Wait a minute: Isn’t Crypto Bad for the Environment?
I originally published this article in Spanish in Gk.City. If you prefer to read it in the original Spanish, click here.
If the purpose of this blog series is to argue that crypto is an important ingredient in helping carbon markets work in order to save the environment, we must necessarily address the question: isn’t cryptocurrency bad for the environment? Before I answer I have to tell a story about Rock and Roll.
If you’d like to receive my weekly newsletter about crypto, climate, and carbon, please sign up to my substack here.
In the 80s and 90s, a myth circulated among musicians about the band Van Halen.
The story went that the band had a clause in its contract that obliged the organizer of each concert to provide M&Ms in the band’s dressing room. The odd part was that, at the band’s behest, the organizer had to remove all of the brown M&Ms.
For many, the story was a warning about vanity and the band’s loss of contact with reality as a result of fame.
The truth, however, was something else, which Van Halen’s vocalist David Lee Roth, explained in a 2012 interview.
According to the singer, Van Halen was one of the first bands to elevate the concert experience through powerful lights and pyrotechnics. A poor configuration of the stage could pose a danger to the band members and the concert crew, so the M&M clause was a check to determine if the organizer had read and complied with the fine details of the contract.
If the band arrived at their dressing room and found brown M&Ms, they knew that their team had to do an in-depth review of the stage.
As in the case of Van Halen, the story told about crypto’s energy use is simultaneously true and false, and if we look no further we miss the point.
Cryptocurrencies, the story goes, pose a risk to the environment due to the carbon emissions they generate as a result of their excessive security protocols.
You may have even heard that cryptocurrencies use the same energy capacity as entire countries, such as Argentina or Finland, or that a slight change in the code could reduce their carbon footprint by 99.5%, but that greedy Bitcoiners don’t want to make the change.
It is true that Bitcoin uses energy, but to say that it is harmful represents a partial understanding of a complex issue.
To get started, we first have to understand that cryptocurrency is a blanket term used to refer to an emerging field that relies on a technology known as blockchain (In the linked text you can find a detailed description of how blockchains work).
For the sake of expediency, we’ll limit ourselves to describing blockchains as decentralized and essentially unhackable databases.
Blockchains are unhackable for two reasons: first, each computer on the network contains a copy of the database; thus, any attempt to introduce false information to the blockchain would have to hack each computer. If one node of the blockchain fails, the information is safe on all the other computers.
Second, each blockchain has a security system that allows it to differentiate valid information from invalid information. The two primary security systems used by blockchains are proof of work and proof of stake.
What is the difference between Proof of Work and Proof of Stake?
In proof of work, which is Bitcoin’s security system, a new transaction has to pass through a process in which massive and complicated mathematical equations have to be solved in order for the information to be registered.
The only way to solve these problems is by harnessing the combined power of many powerful computers.
Think of proof of work as similar to a university degree. If you want to apply for specific jobs, you have to present a piece of paper that shows you did four years of work in order to be qualified.
For every transaction that would like to enter into Bitcoin’s database, a question is asked: did you do the work of solving the mathematical equation? If the answer is yes, the transaction will be accepted by the network. If the answer is no, the transaction will be rejected.
In order to create fake transactions, a hacker would have to harness enough energy to equate 51% of the Bitcoin Network’s total energy capacity. Today, a fake transaction would therefore need about $20 billion dollars worth of computers as well as energy equivalent to 70% of the United States’ daily consumption.
We therefore cannot say that Bitcoin is unhackable, but we can say that it is extremely difficult to hack.
Every computer added to the network makes Bitcoin harder to hack. Bitcoin’s defenders would say that its energy use is a feature, not a bug. They thus scoff at the suggestion that a change in the code would make Bitcoin more efficient. For them, any changes to Bitcoin’s operations represent a threat to its core function, which is to act as an unhackable network.
Here is a good moment to mention a critical point: not all cryptocurrencies use proof of work to ensure the integrity of their network. Indeed, aside from Bitcoin and the meme-based Dogecoin, most blockchains use proof of stake, which does in fact represent a 99.5% reduction in the energy use of proof of work.
In proof of stake, transactions are introduced to the network and different computers compete to register the information in the blockchain. Computers check the transactions to ensure their validity and then “stake” a certain amount of money as a measure of confidence in the transaction’s validity.
Stakers are essentially saying, “I am so confident that this transaction is legitimate I am willing to bet $1 million dollars on it.” If the transaction is proven to be invalid then the staker loses all of her money. If the transaction is valid the staker earns a fee.
So far, proof of stake has proven to be as secure a mechanism as proof of work. In theory, though, someone seeking to introduce fake transactions would only need to hack about 33% of the network’s computers, which is less than is required to hack a proof-of-work blockchain.
Proof of stake is in theory less secure than proof of work, thus causing a major fissure between hard-core Bitcoin supporters and the rest of the crypto ecosystem.
Ethereum, the world’s second-largest cryptocurrency, is currently undertaking the massive task of switching from proof of work to proof of stake.
Now that we recognize that most cryptocurrencies do not consume massive amounts of energy, we can allow ourselves the luxury to indulge in the question of whether or not Bitcoin specifically is a threat to the environment. Again, the answer is complicated.
Is Bitcoin Bad for the Environment?
First, when we stay Bitcoin uses the same energy as a nation like Argentina, we are not differentiating between how dirty or clean that energy source is.
For example, burning coal has an extremely harmful environmental footprint, while hydroelectric is considered a clean energy source.
In order to answer the question, we must first analyze the carbon density of Bitcoin’s sources of energy.
Second, we have to know to what to compare Bitcoin in order to know if, in relative terms, Bitcoin is more harmful than other similar human activities that also use energy.
Finally, beyond the use of energy, we have to take into account some of the Bitcoin use cases that actually help finance renewable energy and reduce greenhouse gas emissions.
As I mentioned, the individuals who dedicate their computer power to helping secure the Bitcoin network (known as miners) are rewarded with newly minted Bitcoin through a lottery. The more attempts the computers make to solve complicated mathematical equations, the more they increase their chances of winning the lottery.
Given that winning newly minted Bitcoin is the economic incentive to participate in the network, Bitcoin miners have two costs they must incur in order to participate: the first is the cost of the advanced computers they use for solving the math problems, and the second is the cost of energy.
The Bitcoin-mining industry is hyper-competitive and the computers basically cost the same for everyone. As a result, the way to seek a competitive advantage in Bitcoin mining is through cheap energy.
If someone were to mine Bitcoin using the same expensive residential energy you use in your home, it would be very difficult for that operation to be competitive and achieve profitability. The cheap energy miners require to compete takes two forms: subsidized energy, and renewable energy.
When a government decides to subsidize something like energy, they usually create what economists call “distortions” or use cases that would be unjustified in normal conditions because they would not be profitable.
In the Americas, there are two countries that massively subsidize electricity, Venezuela and Argentina, and they are the two countries that have the most burgeoning Bitcoin mining operations.
If there were no subsidies, there likely wouldn’t be Bitcoin mining. The problem, therefore, is not that Bitcoin mining exists in these countries, but that government policy makes it feasible.
China is another country that, prior to banning Bitcoin mining in 2021, accounted for 75% of total global Bitcoin mining.
The reason why there was a lot of Bitcoin mining in China is simple: more than 50% of China’s energy production comes from burning coal, one of the most harmful fuel sources due to its high carbon density.
A coal-burning plant must operate at 90% of its capacity even when there is no demand, which creates an overproduction of energy.
When a plant overproduces energy it has two options: it can export the energy to someone who needs it or try to save the energy through batteries or pumped-storage hydropower. Unfortunately for the planet, energy storage as an industry is still in its infancy.
In addition, due to its centrally-planned economy, China often builds infrastructure well before there is demand for it. Bitcoin mining in China was profitable because the country overproduces energy and is willing to sell it to miners for cheap.
When China shut down Bitcoin mining for political reasons (still 20% of the capacity of the Bitcoin network operates from China clandestinely), Chinese miners went to neighboring Kazakhstan, where they found similar conditions and the same source of energy, coal, making the country the world’s second-largest Bitcoin mining power until a socio-political crisis in January 2022 forced the miners to think again about where to move.
In the case of China and Kazakhstan, eliminating Bitcoin mining did not necessarily reduce the emission of carbon into the atmosphere, since coal plants operate at their maximum capacity regardless of whether energy is used or not. Emissions associated with Bitcoin fell by a third when the activity was banned in China, but carbon emissions on a planetary level remained the same.
In the United States, the current most important country in Bitcoin mining after the departure of the Chinese from the market, one of the only ways to make Bitcoin mining profitable is through renewable energy, as residential and commercial energy prices tend to be higher than in most developing countries.
If a Bitcoin mining company has to purchase renewable energy on the market, it ceases to be competitive. The incentive structure, therefore, requires Bitcoin miners to bring new renewable energy sources online. Exactly how much Bitcoin mining is powered by renewable energy? According to a study by Morgan Stanley, the estimates are that as much as 78% of Bitcoin’s total energy consumption comes from renewables.
The other question we need to ask in order to understand Bitcoin’s energy consumption is compared to what?
Bitcoin represents perhaps 0.1% of global carbon emissions.
Airlines account for 2% of global carbon emissions.
When we look at fields more comparable with Bitcoin’s function, we discover that online streaming, including Netflix, YouTube, and the entirety of the online porn industry, accounts for 1% of global carbon emissions, or almost ten times more than Bitcoin. The global financial industry consumes 98.6% more energy than Bitcoin.
When asked what Bitcoin is, many say that it is a kind of digital gold, a commodity that sustains its value over time because it is scarce.
Global gold mining is extremely harmful to the environment and uses about 265 terawatts of energy; Bitcoin uses 9.1 terawatts. Combined, clothes dryers around the world have a greater environmental footprint than Bitcoin.
The truth is that human beings devote energy to activities that we value.
Someone sitting in a café in New York may not value a technology like Bitcoin, for example, because they’ve lived their entire lives without the hardship caused by a mismanaged and volatile national currency.
Someone sitting in a café in Caracas, however, may consider his ability to earn in Bitcoin rather than the undervalued and manipulated local currency to be a lifesaver.
A Ukrainian refugee crossing into Poland with no access to his local bank may also appreciate being able to carry his life savings on his phone or a pen drive. I personally find it hard to look down my nose at others when I stream movies and take international flights, both of which contribute to climate change.
There is an element of subjectivity in the use of energy that is difficult to solve in the context of this article. However, simply stating that Bitcoin uses the same energy as Finland is not a complete argument, since our dryers may use more energy than Sweeden.
Finally, as mentioned above, we have to look at how and why Bitcoin mining takes place in order to understand the nuances of whether or not it’s good or bad for the environment.
One of the main problems with renewable energy is that renewable energy sources do not always produce energy at the exact moment consumers want to consume it.
For example, if there is more wind at night, that energy is wasted.
Ideally, that energy could be stored, but as I said, the energy storage industry is expensive and in its infancy.
When people compare renewable energy prices with carbon-based sources, they’re often not factoring in the cost of energy storage, which means we’re not necessarily comparing apples to apples.
Increasingly, renewable energy companies are entering the field of Bitcoin mining in order to monetize the energy they produce but that is not consumed.
In fact, according to some analysts, the future big miners of Bitcoin will be utility companies seeking to monetize excess energy.
Opening new revenue streams for renewable energies will ultimately lead to new capital spent on creating efficiencies and lowering costs, both of which we need if we want to move away from carbon-based energy sources.
There are other examples from the private sector as well: oil wells produce methane as a derivative of their activity, and methane is a natural gas that is extremely harmful to the planet.
To reduce the negative impact of gas emissions by 75%-90%, oil producers burn methane since they have no way to add it to the electricity grid.
In Texas, one startup is setting up crypto-mining rigs on oil wells that capture the methane and use it to fuel their operation.
Through combustion, the methane’s negative impact is reduced to near zero. The innovation doesn’t end with oil wells: another company is exploring how to mine bitcoin with methane from human waste.
Adding a new field of financing to the renewable sector will only make it more competitive, more innovative, and more sustainable.
Reducing harmful emissions by converting them into fuel for bitcoin mining is a win-win for everyone, including the planet.
At this point, I must admit that this type of analysis is incomplete.
For example, we cannot accurately measure an acitivity’s carbon emissions without taking into account the cost to the environment of building energy sources.
A hydroelectric plant produces energy that is considered green, but the construction of the hydroelectric plant can be carbon-intensive.
In the same way that a Tesla can represent an ecological alternative to a gas-fueled car, if the construction of the Tesla is resource-intensive, and the energy source that recharges it is dirty, we are not necessarily doing good for the planet.
To really analyze the environmental impact of Bitcoin mining, we would have to account for everything from the assembly of the computers, the footprint of shipping those computers around the globe, to the construction of the infrastructure that produces the energy source. Any discussion about the carbon footprint of Bitcoin has to take into account these and other factors.
In short: it is true that Bitcoin uses a lot of energy, but it is not true that cryptocurrencies themselves use a lot of energy.
Moreover, as argued elsewhere, we only really have three means to fund environmental regeneration: governments, charities, and carbon markets. If carbon markets are to succeed where governments and charities failed, we need blockchain technology.
The conversation about the environmental impact of Bitcoin is complex, but the truth is that Bitcoin as a technology is indifferent: Bitcoin is a tool that can run on any energy source. Like a hammer, you can use Bitcoin to do damage, or you can use it to build a house. If we really want to fight climate change, we need all the tools at our disposal.
If you’d like to receive my weekly newsletter about crypto, climate, and carbon, please sign up to my substack here.
