Owning Bitcoin and hoping for its exponential increase in value, is fundamentally incompatible with our efforts to mitigate climate change.
This is a contributing article from Yi Jean Chow, Investment Principal at Future Energy Ventures.
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Two years ago, as cryptomania and ICOs fueled interest in Bitcoin and cryptocurrencies, substantial concerns were raised about the significant energy requirements of Bitcoin’s blockchain. Those critiques were forgotten as the crypto-craze died down, but as interest in Bitcoin has revived in recent months — reaching all-time high prices of $40,000 — the energy consumption of Bitcoin miners has ramped up again. Current estimates indicate a 110TWh annualised energy consumption for Bitcoin, more than twice the energy consumption of 40TWh in 2018. For comparison, the total annual electricity consumption of the UK is approximately 350TWh.
I believe we need a movement to divest from Bitcoin that is stronger than the efforts to divest from oil & gas companies. There is a very clear direct relationship between owning bitcoin, increasing its value through increased scarcity & demand, and increasing energy consumption.
This argument is not new — most people have heard about Bitcoin’s (or specifically its Proof of Work’s) energy consumption. But it’s critical to understand that Bitcoin’s energy consumption is not fixed: it increases as the value of Bitcoin increases.
The genius of Satoshi’s crypto-economic invention was integrating the security of Bitcoin’s ledger with the incentive mechanism for miners. The higher the price of Bitcoin, the greater the incentive for an attack, therefore the greater the need for cryptographic security.
At the same time, as the price of Bitcoin increases, the greater the financial value of the “block reward”, and the more energy & computing power miners should be willing to spend to mine for the bitcoin block rewards. As more miners pour computing power to the mining process, the “hash rate”, or difficulty of the computing process increases (making an attack on the Bitcoin blockchain more difficult, therefore increasing chain security)— but all miners have to increase their computing and energy input to obtain the Bitcoin block reward.
Think of this like the price of oil: the higher the price of oil, the greater the incentive for oil companies to find “expensive” oil in hard to extract areas (e.g. the Arctic, deep sea drilling), and typically the greater the environmental cost.
This is the same with Bitcoin. The higher the price of Bitcoin, the more money & energy miners are willing to spend to mine for Bitcoin, and usually the marginal sources of electricity are fossil-based energy sources with high carbon intensity.
Supporters of Bitcoin will say that a significant proportion of Bitcoin mining takes place with renewable energy. Data is unclear, and there is economic sense to support this at low Bitcoin prices — if the value of Bitcoin is low, it’s only worth expending low-cost energy to mine Bitcoin, and typically this is renewable energy where there is zero marginal cost for each kWh. As the price of Bitcoin rises, it’s worth spending more per kWh of energy, and miners are incentivised to use any (including fossil/carbon intensive) sources of electricity.
Data from University of Cambridge’s Centre for Alternative Finance shows clearly that most Bitcoin mining takes place in China. While there are large sources of renewable energy, over 50% of China’s electricity still comes from coal. It’s short-sighted and naive to hope that Bitcoin is mostly powered by renewable energy. Many people I’ve spoken to think all the miners are in Iceland, using cheap, renewable geothermal energy — Iceland is not even on the list of 10 largest miners. Most countries on the list are not known for their high renewable generation output, but rather for their oil and gas production. The reality is there is definitely a carbon cost involved, and the higher the price of Bitcoin, the greater the carbon cost.
I’m not against the principle of Bitcoin, decentralised finance, or distributed ledger technologies. I believe there’s huge potential for cryptocurrencies, but we need to be aware the as the price of Bitcoin rises, so does its huge energy and environmental impact. There are other alternatives for distributed ledger consensus mechanisms — proof of stake, proof of authority, for instance — which other blockchains are working towards. But proof of work in its current instantiation is not compatible with our climate goals.
We cannot be incentivised to increase the value of Bitcoin as a long-term investment option and hope for its exponential increase in value — the environmental and carbon cost will simply be too large.
Elon Musk has recently shown public support from Bitcoin, and announced Tesla had bought $1.5bn in Bitcoin — sending Bitcoin prices soaring to $44,200. If the price and energy consumption of Bitcoin increases 20%, by an estimated 20TWh, this will be more than the cumulative electricity generated by all Tesla solar systems, ever. The latest Tesla Impact report noted that Tesla solar systems had generated a cumulative 13.25TWh (not annualized) — cumulative for all-time.
In a future world, where all our electricity comes from renewable sources and there is an abundance of renewable energy, perhaps Bitcoin will be an important part of our financial system — but until & unless that happens, we cannot look past the climate impact of Bitcoin.