Bitcoin’s virtual gains have big energy consequences in the real world
One of the big appeals of the internet is that it’s virtual. You can seamlessly transfer files from one computer to the next across a network instantly and without using up physical resources. Why print out reams and reams of paper when you can just share files and open them online. That’s also a key aspect of cryptocurrency. It’s not printed or minted by a government’s central bank. It’s not physical, not tangible. You can transfer it quickly and seamlessly across the globe.
But it’s not exactly divorced from the physical world. Even though mining crypto is completely different from extracting resources from the ground, it still requires energy. Mining bitcoin, the first decentralized cryptocurrency and by far the most popular, consumes more energy on an annual basis than some countries. And we’re not talking tiny European principalities. We’re talking more energy than big countries like Argentina, according to the Cambridge Bitcoin Electricity Consumption Index. Given bitcoin’s value and popularity, that poses a big environmental issue.
Countdown to 21 million
Much like gold or other precious metals and minerals, there is a finite amount of bitcoin to mine. The elusive developer or developers of bitcoin, using the moniker Satoshi Nakamoto, wrote into its source code that there will only ever be 21 million bitcoin. More than 18.5 million of those have been mined already, and the paucity of remaining bitcoin is one factor driving its astronomical rise in value. It’s (relatively) rare, not something people can just keep making more of. Because of its decentralized blockchain tracing, it’s very difficult to counterfeit. Thus, there’s a great deal of competition among miners to harvest what remains.
Instead of delving deep into the earth to extract the resource, bitcoin miners must solve complex math problems to obtain the object of their desire. To accomplish this, they need increasingly powerful computers, and those computers need increasing amounts of energy to function.
“We’re talking about multiple terawatts, dozens of terawatts a year of electricity being used just for bitcoin … That’s a lot of electricity,” University of New Mexico economics professor Benjamin Jones told the Guardian. Estimates vary, but they range from about 80 to 130 terawatt hours per year.
Bitcoin proponents say miners are increasingly using power from renewable sources to keep their carbon footprints down and point to the fact that more energy goes to waste from people leaving devices they aren’t using plugged in than bitcoin mining consumes.
Jones’ research found that in 2018, for every dollar of bitcoin value created, 49 cents worth of damage occurred to health and the environment.
“With each cryptocurrency, the rising electricity requirements to produce a single coin can lead to an almost inevitable cliff of negative net social benefit,” he and his team concluded.
‘The World’s Currency’
Of course, even in the short time since that research was published in 2019, the value of bitcoin has increased dramatically. One bitcoin hit a value of $50,000 for the first time in February, and Jesse Powell, CEO of cryptocurrency exchange Kraken, thinks a million-dollar valuation within the next decade is “very reasonable.”
Bitcoin certainly has a number of factors working in its favor. Wall Street is turning a more favorable eye toward it, with Goldman Sachs executive Jeff Currie saying the cryptocurrency market is maturing and institutional investment could help stabilize it. The COVID-19 pandemic has also lowered confidence in central governments in some circles, sparking diminished trust in fiat currency.
“Bitcoin is going to infinity, the moon, Mars, and eventually it’ll be the world’s currency,” Powell told Bloomberg.
As the price increases, the economic incentive for miners increases, and worrying about how they’re powering their mining is of secondary concern to getting the remaining bitcoin mined before someone else does. When you’re mining in bulk, it makes economic sense to do that work wherever electricity is cheapest, which is often places that rely on coal power. One such place is China, where nearly two thirds of the world’s bitcoin mining takes place.
In the Inner Mongolia region, which accounts for about 8% of mining — more than the U.S.’s 7.2% — the government plans to shut down all remaining bitcoin mining operations by this month and not authorize any more. It’s part of China’s stated goal of carbon neutrality by 2060.
Ways to Improve
Although there are less than 3 million bitcoin left to mine — unless the cap of 21 million is lifted, which is a complex story itself — block reward halvings every 210,000 blocks mean that the 21 millionth bitcoin won’t be mined until 2140 or so. If it’s going to be with us for another 120 years or more, even becoming the “world’s currency” as Powell and others dream, bitcoin mining needs to get more environmentally friendly. Otherwise, the damage it does will outweigh its value to society.
If bitcoin is to be a force for good, among other things making banking and foreign exchange cheaper and more accessible for people in developing countries and increasing social trust, it needs to do less harm. Competitor Ethereum vowed in 2019 to cut its electricity usage by 99%.
“That’s just a huge waste of resources, even if you don’t believe that pollution and carbon dioxide are an issue. There are real consumers — real people — whose need for electricity is being displaced by this stuff,” Ethereum creator Vitalik Buterin told IEEE Spectrum at the time.
It’s basically impossible to know how many people own at least a portion of one bitcoin, but whatever the number is, it’s in the tens of millions now and perhaps as much 1.3% of the world’s population. Much the same as with fiat currency, there’s a large gap separating the richest bitcoin holders from everyone. The top 750 owners collectively have more than 3 million bitcoin, about a sixth of the total mined. “Satoshi Nakamoto” owns more than 1 million and hasn’t moved any in more than a decade. Thanks to lost passkeys, sudden deaths, thrown-away hard drives, and other calamities, another 2.5 to 3 million bitcoin might be untouchable forever.
If bitcoin truly became the world’s currency, that would leave a lot of people in the physical world penniless.