Why the bitcoin boom might represent a huge energy issue
The first time I heard the word “Bitcoin” was about one year ago, when the Internet was flooded with articles and news regarding this new cryptocurrency. As soon as I could, I started to gather information in order to understand the reason for the massive returns earned by people who had invested in Bitcoin. Everything seemed great, until I discovered an alarming aspect: Bitcoin creation requires a huge amount of energy. Namely, (Digiconomist, December 2018) shows that it consumes more energy than some European countries do in a year.
Everyone has surely heard the word Bitcoin, but what is it really? It is a peer-to-peer cryptocurrency (digital currency) mainly used for monetary transactions on the Internet. Peer-to-peer (P2P) is a decentralized communications model in which each party has the same capabilities and either party can initiate a communication session. The interesting thing is that Bitcoins are intrinsically valueless, and their only value is derived from the value placed in them by the people who trade them (O’Dwyer & Malone, 2014). Although Bitcoins have existed since 2009, only one year later someone decided to sell theirs for the first time – swapping 10,000 of them for two pizzas. Since they have had a very low value, no one showed any sort of interest until 2017. In 2017 major investors started purchasing them consistently, attracted by an increasing number of users. They probably had not imagined that investing in Bitcoins would be the most successful “risk” of their life: in March 2017 Bitcoin’s total market value reached 20 billion USD. This stratospheric number led many central banks to start exploring the adoption of cryptocurrency and blockchain technologies for retail and large-value payments (Chiu & Koeppl, 2017). An amusing fact is that if the very first buyer had kept those 10,000 Bitcoins, he would have become rich after several years. In December 2017 they would have been worth more than $100 million (Marr, 2017).
How does it work? The backbone of this cryptocurrency is “mining”, a misleading word that has nothing to do with digging out coins from the ground. Technically speaking, mining is a process where valid transactions are collected into blocks added to a ledger, forming a blockchain. Adding a block is a challenging computational task, consisting of finding a signature which links the transactions in the block to the previous blocks. This is done by solving a complex mathematical puzzle that is part of the Bitcoin code, and by including the answer in the block. More technically, the solution is to find a number that, when combined with the data in the block and passed through a hash function, produces a result that is within a certain range (Acheson, 2018). The reward for the member of the peer-to-peer network who solves the puzzle is the possibility to earn Bitcoins.
Energy and environment. The worrisome part comes when we focus on the relationship between energy and Bitcoins. This complex method, based on the use of massive computational power, has the consequence of consuming an enormous amount of energy. Currently Bitcoin’s annual energy consumption is higher than that of several countries, as shown in Figure 1.
Surprisingly, if Bitcoin was a country, its energy consumption would be ranked between Bangladesh’ and Israel’s! An important consideration should be, how much does this consumption affect the environment.
According to experts, if Bitcoin’s rate of adoption follows that of other widely used technologies, it could create an electricity demand capable of single handedly producing enough emissions to exceed 2°C of global warming in just a few decades (Mora, et al., 2018). More precisely, it was estimated that in 2017 the total carbon dioxide emissions (CO2) due to the mining of Bitcoins reached 69 million tons, which is almost the amount produced by 15 million passenger vehicles driven for one year. This amount is impressive if you consider that Bitcoin’s share of the global annual cashless transactions was only 0.033%. It is incredibly shocking that the goal of mitigating greenhouse gas emissions and keeping anthropogenic global warming within 2°C to avoid the impacts of catastrophic climate hazards, ratified by leaders from 176 countries in the Paris Agreement, could be literally destroyed by one single cryptocurrency!
The situation is even worse if we consider the recent news announced by the Intergovernmental Panel on Climate Change (IPCC): the 2°C-range target is not enough anymore to prevent unmeasured environmental disasters. Something needs to be done to limit the rise of temperature to 1.5°C. If policy makers do not act now (perhaps it is already too late), the risks of drought, floods, extreme heat and poverty for hundreds of millions of people will worsen significantly. Specifically, scientists stated that “climate-related risks to health, livelihoods, food security, water supply, human security, and economic growth are projected to increase with global warming of 1.5°C and increase further with 2°C” (IPCC, 2018), meaning that we are not safe even in the best scenario.
Nevertheless, in order to fulfil those goals, unprecedented efforts to cut, and eventually eliminate fossil-fuel use almost entirely, have to be made as soon as possible. The magnitude of those challenges leads to a reasonable consideration: Bitcoin’s energy consumption issue needs to be solved immediately! Time is running out!
Possible solutions. The secret to reducing Bitcoin’s carbon footprint lies in a sharp improvement of the hardware utilized for mining. The problem is that it is easier said than done, and time plays a key role in our battle. Therefore, simpler solutions must be found in a shorter period. For instance, easier modifications to the overall system can be made, such as adding more transactions per block or reducing the difficulty or time required to resolve the proof-of-work — both of which could result in immediate electricity reductions for Bitcoin usage (Mora, et al., 2018). Moreover, more energy efficient algorithms, like proof-of-stake, have been in development over recent years. In proof-of-stake coin owners create blocks rather than miners, thus not requiring power hungry machines. Because of this, the energy consumption of proof-of-stake is negligible compared to proof-of-work. Bitcoin could potentially switch to such a consensus algorithm, which would significantly improve its sustainability (Digiconomist, 2018).
Conclusion. In the complexity of the different changes that have to be made by global governments, the risks caused by the CO2 emissions deriving from the creation of Bitcoins represent an additional massive problem. Indeed, not changing anything can lead to a complete failure, even if all the other challenges are overcome. Therefore, Bitcoin’s energy consumption is something governments must immediately take into account, controlling the trading and applying strict regulations. There is no more time available, the world is facing the biggest threat of the 21st century. The time to act is now.
By Leonardo Buralli
Published 26th June 2019
Acheson, N., 2018. How Bitcoin Mining Works, available on www.coindesk.com.
Chiu, J. & Koeppl, T., 2017. The Economics of Cryptocurrencies - Bitcoin and Beyond.
Digiconomist, 2018. Bitcoin Energy Consumption Index, available on www.digiconomist.net.
IPCC, 2018. IPCC Report 2018 - Summary for Policy Makers.
Marr, B., 2017. A Short History Of Bitcoin And Crypto Currency Everyone Should Read, available on www.forbes.com.
Mora, C. et al., 2018. Bitcoin emissions alone could push global warming above 2°C, Nature.
O’Dwyer, K. J. & Malone, D., 2014. Bitcoin Mining and its Energy Footprint, Hamilton Institute National University of Ireland Maynooth.