Will Bitcoin’s energy issues turn off investors?

Cryp­tocur­ren­cy has long had a dirty secret: the ener­gy need­ed for bit­coin min­ing. 

Cryp­to evan­ge­lists – who believe a decen­tralised finan­cial sys­tem is for the greater good – tend to ignore this incon­ve­nient truth. In May, how­ev­er, when Tes­la boss Elon Musk decried the envi­ron­men­tal effects of the min­ing that goes into val­i­dat­ing bit­coin trans­ac­tions, the ener­gy issue became a burn­ing top­ic. 

It’s a big prob­lem for cryp­tocur­ren­cies because the major­i­ty of investors (77%) are aged under 45, accord­ing to a study pub­lished ear­li­er this year by Gem­i­ni Exchange. These con­sumers are also more eco-con­scious than old­er gen­er­a­tions. Indeed, Musk’s damn­ing assess­ment arrived at the same time that a Pew Research Cen­ter study found that 37% of Gen Z and 33% of mil­len­ni­als in the US cite cli­mate change as their top per­son­al con­cern.

Unsur­pris­ing­ly, some wor­ry that these investors could sour on bit­coin and oth­er ener­gy-drain­ing cryp­tocur­ren­cies. Bit­coin in par­tic­u­lar is a vic­tim of its own suc­cess, at least when it comes to envi­ron­men­tal con­cerns. This is due to its ‘proof-of-work’ pro­to­col: a decen­tralised con­sen­sus mech­a­nism that requires mem­bers of the net­work to expend effort solv­ing an arbi­trary math­e­mat­i­cal puz­zle so that no one can hijack the sys­tem. 

It’s a vicious cor­re­la­tion, because the high­er bitcoin’s mar­ket val­ue – in Feb­ru­ary it eas­i­ly became the quick­est asset in his­to­ry to reach $1tn, after only 12 years – the more ener­gy is con­sumed.

The lat­est bit­coin bull run, which began at the end of 2020, has sparked a surge in min­ing, bring­ing with it increased ener­gy con­sump­tion. It’s no coin­ci­dence that China’s gov­ern­ment has cracked down on cryp­to: the vast major­i­ty of bit­coin is mined there, dri­ving up ener­gy demand and mak­ing it hard­er for the coun­try to achieve its tar­get of net-zero emis­sions by 2060.

Solving the proof of work energy issue

Cur­rent­ly, bit­coin would rank as the 32^nd-high­est nation in the world by ener­gy con­sump­tion, ahead of the Nether­lands. Bit­coin and ethereum between them con­sume more than three quar­ters of the elec­tric­i­ty used by all cryp­tocur­ren­cies. Notably, the oth­er three on the list of the five worst offend­ers – doge­coin, bit­coin cash and lite­coin – all use the ‘proof-of-work’ pro­to­col.

Bitcoin’s ener­gy con­sump­tion has more than quadru­pled since the begin­ning of its last peak in 2017, says Charles Hoskin­son, co-founder of ethereum – the sec­ond largest cryp­to by mar­ket cap­i­tal­i­sa­tion. “It’s set to get worse because ener­gy inef­fi­cien­cy is built into its DNA,” Hoskin­son argues. As chief exec­u­tive of glob­al blockchain engi­neer­ing firm IOHK, he’s also the dri­ving force behind third-gen­er­a­tion cryp­tocur­ren­cy car­dano.

Accord­ing to Hoskin­son, bitcoin’s car­bon foot­print will “become expo­nen­tial­ly worse because the more its price ris­es, the more com­pe­ti­tion there is for the cur­ren­cy” and thus the more ener­gy it con­sumes. 

Oth­er, green­er con­sen­sus mech­a­nisms are gain­ing in pop­u­lar­i­ty, such as the ‘proof-of-stake’ blockchains that under­pin cryp­tocur­ren­cies like car­dano, polka­dot and algo­rand, and don’t require min­ing. Proof-of-stake uses con­sid­er­ably less ener­gy than proof-of-work chains, because “net­work par­tic­i­pants are cho­sen to val­i­date ‘blocks’ of trans­ac­tions based on how many coins they hold rather than the com­pu­ta­tion­al pro­cess­ing pow­er they have”, Hoskin­son explains. He esti­mates that car­dano is “four mil­lion times” more ener­gy effi­cient than bit­coin.

Going green, one block at a time

Mon­i­ca Long, gen­er­al man­ag­er of Rip­pleX, which pro­vides open-source code and devel­op­er tools to accel­er­ate inter­op­er­a­ble blockchain tech­nol­o­gy, agrees that proof of work is “very ener­gy inten­sive”. How­ev­er, she says things are chang­ing rapid­ly, not­ing that ethereum will short­ly be switch­ing to a proof-of-stake pro­to­col that is expect­ed to reduce elec­tric­i­ty con­sump­tion by 99%.

Many wel­come both the Bit­coin Min­ing Coun­cil, unveiled by Musk in May to mon­i­tor and improve the industry’s sus­tain­abil­i­ty, and the Cryp­to Cli­mate Accord, which is a pri­vate sec­tor col­lab­o­ra­tion focused on mak­ing all blockchains car­bon neu­tral by 2030.

Rhi­an Lewis, author of The Cryp­tocur­ren­cy Rev­o­lu­tion: Finance in the Age of Bit­coin, Blockchains and Tokens, says it’s vital to keep things in per­spec­tive. “Mod­ern life is by its very nature ener­gy inten­sive. In the US alone, the ener­gy con­sumed by inac­tive house­hold devices left on stand­by every year would pow­er the entire bit­coin net­work for 1.9 years.”

And when peo­ple com­pare the ener­gy con­sumed by a trans­ac­tion on the Visa net­work, for instance, with a trans­ac­tion on the bit­coin net­work, it is a “false equiv­a­lent”, she says. “A trans­ac­tion on Visa needs the entire world bank­ing sys­tem to be in place before its trans­ac­tion can be processed, with all the phys­i­cal infra­struc­ture of banks, their build­ings, peo­ple trav­el­ling between them, phys­i­cal mon­ey being mint­ed and trans­port­ed, and so on. In con­trast, bit­coin does all that inher­ent­ly.”

An eco-friendly future? 

Pavel Matveev, founder and chief exec­u­tive of Wirex, a cryp­to pay­ment card, believes bitcoin’s ener­gy con­sump­tion is the excep­tion in the indus­try. “With more than 4,000 cryp­tocur­ren­cies in exis­tence, there are plen­ty of envi­ron­men­tal­ly friend­ly options avail­able, and many more on the way,” he says. 

For exam­ple, he points to nano, a eco-friend­ly cryp­tocur­ren­cy that doesn’t rely on min­ing, print­ing or mint­ing and aims to address the cur­rent inabil­i­ties in today’s exist­ing finan­cial sys­tems and lim­its fees while pro­vid­ing quick trans­ac­tion speeds.

Giv­en the intro­duc­tion of less ener­gy-inten­sive coins and a move towards renew­able ener­gy for min­ing, cryp­to could well become a more eco-friend­ly pay­ment sys­tem in com­ing years, he sug­gests.

“Even the less eco-friend­ly cryp­tos can still be bet­ter for the envi­ron­ment than tra­di­tion­al cur­ren­cy,” says Matveev. “Imag­ine: good­bye plas­tic cards, paper receipts and pen­nies.

“Ulti­mate­ly, not only does dig­i­tal mon­ey offer many great advan­tages, but it’s a step towards a green­er future over­all.”

Per­haps Musk’s ener­gy truth bomb was just what the indus­try need­ed to hear to clean up its act, even if, in the long term, the appeal of the orig­i­nal cryp­to is over­tak­en by more envi­ron­men­tal­ly con­scious alter­na­tives.