Worried About Bitcoin’s Environmental Impact? The Situation Is More Nuanced Than You Think.
Note: The environment is important to us here at Makara, as is addressing the possible negative effects Bitcoin can have on it. That’s why we intend to make this the first in a series of posts where we’ll examine Bitcoin’s environmental impact, what is being done, and what should be done in the future.
Much of the opposition to Bitcoin and the debate over its environmental impact is based on a misunderstanding of how Bitcoin works, a misleading subset of data, or worst-case interpretations of the facts. Yes, Bitcoin mining consumes large amounts of energy; that is a byproduct of how the network secures itself. The Proof of Work (long combinations of characters that miners race to guess) required to validate each block of the blockchain almost entirely removes the possibility of, and incentive for, falsifying records. Also—and this should come as no surprise—other banking systems and the mining of other commodities, such as gold, require just as much energy as Bitcoin, and often more. Many of those other industries need to be in one particular location, yet Bitcoin can be mined from anywhere with an internet connection, allowing miners to set up shop in areas with alternative energy sources or with excess energy that would otherwise be wasted. That’s why Yassine Elmandjra, a cryptoasset analyst with ARK Invest, a New York City asset management company, calls Bitcoin mining “a net positive for the environment.”
The Arguments Against Bitcoin
Many of the most common misconceptions about Bitcoin’s environmental impact stem from the same research paper. A 2018 study in the journal Nature Climate Change concluded that “projected Bitcoin usage, should it follow the rate of adoption of other broadly adopted technologies, could alone produce enough CO2 emissions to push warming above 2°C within less than three decades.” To estimate these emissions, the authors extrapolated a scenario in which Bitcoin replaces all other financial systems and accounts for every single global transaction, from mortgage payments to coffee runs.
Bitcoin, on its own, simply cannot achieve such volume. Each new block in the blockchain takes an average of 10 minutes to build (the time required for mining nodes to guess the long strings of characters and numbers) and contains an average of 2,759 transactions. That means Bitcoin can handle approximately 400,000 transactions per day (as opposed to Visa, which alone processes an estimated 150 million transactions a day). And Bitcoin’s pace will never increase. As Wolfie Zhao explains, “Bitcoin is designed to adjust its mining difficulty every 2,016 blocks (approximately 14 days), based on the amount of computing power deployed to the network. This is done to ensure the block production interval at the next period will remain constant.” So if fewer miners are active, the character combinations get easier to guess; if more are involved, it gets harder. Either way, that 10-minute average—and the number of financial transactions each Bitcoin block can handle—stays the same.
There is a way to increase Bitcoin’s transactional output to a level capable of handling the global need, but it involves layering a second network, such as Lightning, over the blockchain. This technology allows millions of microtransactions to be packaged into a single block, but if it were used, the CO2 emissions per individual transaction cited by the study should decrease by a factor of millions.
The other issue with the 2018 study is that it treats all forms of electricity used in Bitcoin mining as having equivalent CO2 emissions. In the September 2020 3rd Global Cryptoasset Benchmarking Study, the Cambridge Center for Alternative Finance found that 76% of cryptocurrency mining operations use some form of renewable energy, lowering their carbon footprints. As renewable energy becomes more price competitive with fossil fuels (the International Renewable Energy Agency says that “half of new solar and wind installations undercut fossil fuels in 2019”), the mining industry will have even more incentive to shift. Considering that electricity costs are the single most expensive part of mining—and that miners can operate anywhere in the world with an Internet connection—mining operations can be most profitable where the energy is cheapest.
The Arguments for Bitcoin
Mining often uses the energy no one else wants. According to investment strategist Lyn Alden, “a significant portion of the energy that Bitcoin uses could otherwise be wasted. Examples of this include over-built hydroelectric dams in certain regions of China, or stranded oil and gas wells in North America.” There either isn’t enough demand close enough to power plants, or the demand fluctuates enough to cause frequent production surplus. In China’s Sichuan province, for instance, the “installed hydro capacity is double what its power grid can support,” writes Nic Carter. “Dams can only store so much potential energy in the form of water before they must let it out.” There’s a similar issue with natural gas that occurs as a byproduct of oil production. If there is no nearby pipeline, these gases are flared, or burnt off, and completely wasted. But if a mining operation opens nearby, that gas can be used to generate electricity. In response, companies like Upstream Data in Canada and Giga Energy Solutions in Texas created self-contained, mobile mining equipment that can be placed wherever the excess gas is. They’re turning inexpensive wasted energy into pure opportunity.
Mining incentivizes innovation in renewable energy. A joint study done by Square and ARK Invest in April 2021 found that the industry presents an “opportunity to accelerate the global energy transition to renewables.” Basically, if the pricing of renewables beats fossil fuels, then Bitcoin miners will migrate to it. The more renewable energy miners use, the more infrastructure can be developed and deployed, creating a virtuous cycle. Miners are effectively telling renewable energy creators: Build up your capacity and optimize efficiency to create all the power you can. If it’s cheap, we’ll be there to buy and use it. You can also see this happening in popular mining countries like Norway and Iceland, which have abundant and inexpensive hydroelectric and geothermal energy. (The countries’ low temperatures also cool servers naturally, further reducing the energy consumption of local mining operations.) Similarly, the hydroelectric power offered in the Pacific Northwest makes states like Oregon attractive for mining locations in the United States, says Katrina Kelly-Pitou, a clean-energy researcher.
Mining creates less greenhouse gas and uses less energy than other commodities and financial networks (or watching YouTube). According to Arcane Research, the entire category of digital technology creates 1,600 million tons of CO2 every year. At just under 37 million tons, Bitcoin contributes only 2.3% of that figure. By comparison, the company’s data shows that the total CO2 created worldwide by people watching YouTube and gaming is 39.6 million tons. From the energy perspective, Kelly-Pitou points out that, “Banking consumes an estimated 100 terrawatts of power annually. If Bitcoin technology were to mature by more than 100 times its current market size, it would still equal only 2% of all energy consumption.” And Alden, the investment strategist, compares Bitcoin mining to gold mining. Like Bitcoin, she says, gold is very rare and in limited supply. “[Gold] takes a ton of energy and time to get into pure form. And then we have to spend more energy transporting, securing, and verifying it from time to time,” Alden says. Despite this, major media outlets are not writing articles about the potential environmental impact of gold.
The entire crypto industry is continually looking to improve. In a New York Times article criticizing cryptocurrencies’ energy use, Hiroko Tabuchi notes, “There are efforts afoot to make blockchain technologies more environmentally sustainable—and to put them to use in climate policy. The nonprofit group Blockchain for Climate, for example, has led the way in developing ways to use blockchain for carbon trading—in other words, systems that allow one country, or company, to pay and take credit for carbon-emissions reductions in another country or company.” Plus, some cryptocurrencies, including the popular Ethereum, are trying to transition from the energy-intensive Proof of Work system to a much more efficient Proof of Stake system. Instead of guessing combinations of characters, miners put up large amounts of their own coin as collateral (effectively putting financial skin in the game) in order to be allowed to verify a transaction and mint new coins. If they are caught falsifying the record, they lose their stake.
We are not saying that Bitcoin mining does not consume vast amounts of energy. It does; however, just because something consumes energy does not mean that it wastes it. By demanding so much energy, Bitcoin keeps itself safe from manipulation and bad actors. And by being location agnostic and innovative, Bitcoin can ensure that the energy it does use comes from renewable sources or harvested ones that would otherwise be wasted. Gold can’t do that. And not many industries can even hope to do what Bitcoin, in barely a decade of existence, already has: Get people excited for the future.