By Kiran Gupta
Cryptocurrency, dubbed the digital gold of the 21st century, has been hailed as a decentralized, potentially game-changing solution in the financial sector. With Bitcoin taking the lead, the cryptocurrency frontier has seen unprecedented growth over the years. However, there's a shadow looming large behind the glitz and glitter of digital coins - the environmental impact. Bitcoin mining, a practice of doing complex math to earn a stake on the blockchain, is very energy intensive, using large amounts of power to run powerful computers. In fact, bitcoin transactions alone uses an estimated 150 terawatt-hours of power annually. As computing power increases, competition rises, requiring miners to use more energy to mine a smaller amount of cryptocurrency. However, before we can analyze the environmental impact of cryptocurrencies, it is important to understand what they are, and how they work.
Cryptocurrencies are forms of digital currencies which are validated on the blockchain, essentially a public ledger on the internet. Cryptocurrencies are not backed by any organizations, governments, or physical tender. This is a form of decentralized finance, or DeFi. Cryptocurrencies can be first acquired by ‘mining’ them, essentially doing many complex calculations, called hashes, which are then checked against the blockchain to validate. Additionally, there are two types of cryptocurrency classifications, proof of work and proof of stake. The process of mining is not just a digital affair; it has a real-world impact, devouring substantial electricity to fuel the computational power required for mining. The environmental toll isn't confined to energy consumption alone; it extends to climate, water, and land impacts, as highlighted by recent research by United Nations scientists.
Cryptocurrency miners can take many forms, but are divided into two categories, GPU miners and ASICs. Other mining strategies, such as CPU or hard drive mining are possible, but not nearly as profitable as GPUs or ASICs. GPU miners are a cluster of GPUs, usually consumer products run by individual people. These mining rigs are cheaper but have a significantly lower hash rate and power efficiency than ASICs. ASICs, Application Specific-Integrated Circuits, are computers built for the sole purpose of mining, usually designed for one specific token. These are significantly more expensive than GPUs but have a much higher hash rate and lower power consumption. However, these computers are essentially worthless after new versions are released, unlike GPUs which can be sold to consumer markets. This creates an estimated 30,700 tons of E-waste every year just from crypto.
It is very power intensive to mine cryptocurrency, with the number one expense for mining operations being electricity costs. This is due to the competitive nature of mining, stemming from the difficulty of calculations and the number of miners on the network. On the financial side, the price of bitcoin is set by the buyers and sellers, essentially what the majority of users are willing to buy or sell it for. The supply cap is the reason that bitcoin is one of the most stable coins. When bitcoin was created, a supply cap of 21 Million coins was implemented. Currently 19 million coins have been mined, leaving 2 Million left. This supply cap ensures that there are not an infinite number of coins, a fundamental principle of economics. As more coins are mined, and more miners are on the network, the difficulty to mine increases. In fact, every four years the difficulty to mine bitcoin doubles, in a process called halving designed to fight inflation and account for increases in computing power. Therefore, as more bitcoins have been mined and mining is gaining popularity, the amount of electricity required to mine an equivalent amount of currency has gone up dramatically.
In 2009, when bitcoin was first launched, a coin could be mined in a few hours with a normal work laptop. Now, you would need 1.25 million dollars’ worth of bitcoin mining computers to mine one coin per day. Even in the most efficient mining operations, one bitcoin requires 155,000 kWh of electricity to mine. In comparison, the average US household uses 900 kWh of electricity every month. This staggering power draw is worsened when considering that currently 945 Bitcoins are issued per day. That is 147 million kWh of power, or 147 Gigawatt hours. For reference, that is 1.3% of the total power used in the US every day.
Bitcoin mining has been a controversial topic for many years, especially after it gained popularity. In fact, China cracked down on Cryptocurrency in May 2021, banning crypto mining, trading, and prohibiting financial institutions from offering services related to crypto. China explained this ban by stating that the energy intensive mining was harming their environmental goals. It is important to acknowledge that crypto is nearly impossible for governments to track, and transactions can be made internationally without any trace or fee. The result of the Chinese crypto ban is not a reduction of mining, rather a transition of mining supply to other countries, some with more reliance on non-renewable energy sources. Currently, renewable energy sources make up 50.9% of China’s total energy production. Miners from China flocked to Kazakhstan and the US, which have a 4.5% and 13.1% renewable energy production respectively. This means that significantly more non-renewable energy is used to mine cryptocurrencies following the Chinese ban.
At this point, cryptocurrency is not going away anytime soon, and its impact on the modern-day financial markets is substantial. However, there are steps which can be taken to drastically reduce the amount of electricity consumed by the sector. One major change which could drastically reduce the energy draw of cryptocurrencies is switching individual coin’s classifications from proof of work to proof of stake. Currently Bitcoin relies on a proof of work mining model, which has miners compete to solve complex, random calculations, creating another block on the blockchain and providing a portion of a coin. Proof of stake on the other hand requires very little computational power and operates based on staking coins based on the amount of transactions and wallet size. It is estimated that proof of stake networks use over 99% less power than proof of work networks. Switching large coins, such as Bitcoin, to proof of stake consensus would dramatically reduce the amount of power consumed by the network, eliminating a massive power draw from the world.
Cryptocurrencies are an inevitable aspect of the evolving digital economy, and the use of which will only increase. However, there is no denying the environmental impacts of crypto, such as e-waste and massive electricity draws from digital mining. Addressing these challenges head-on with innovative solutions like more energy-efficient consensus mechanisms and promoting responsible e-waste disposal are imperative to foster a more sustainable crypto-ecosystem. As the crypto frontier continues to expand, marrying the principles of decentralized finance with environmental stewardship will be paramount in ensuring that the digital currencies of tomorrow are both economically and ecologically viable.