Cryptocurrencies are digital currency that are not subject to a central authority that regulates the currency’s value like Federal Reserve for the U.S. dollar or the European Central Bank for the euro. Despite fluctuating market values that are more volatile than most nationally backed currencies, cryptocurrency has taken a foothold in the financial world.
The most popular cryptocurrency, bitcoin, has a combined market value of $653 billion U.S. dollars—equivalent to 1.8% of the combined value of the world’s money supply, according to Investopedia.
A Massive Footprint
Most of the energy expenditure of cryptocurrency comes from the process by which coins are made available known as mining. Mining involves computers with large processing power and energy consumption solving a series of mathematical equations that helps verify proof of transactions.
Bitcoin mining consumes around 110 terawatt hours per year, which is 0.55% of global electricity production, according to the Cambridge Center for Alternative Finance. This is roughly equivalent to the annual energy draw of countries like Malaysia or Sweden.
Forbes reported that mining sometimes barely allows miners to break even with the crypto they receive for “validating transactions after considering the costs of power and computing resources.”
“There is a direct relationship between the price of bitcoin and the energy consumption of its network,” said Alex de Vries, a Dutch data scientist and founder of the cryptocurrency blog Digiconomist.
Experts like de Vries are concerned that the average user of cryptocurrencies should be aware of the energy expenditure these systems utilize.
In 2016, de Vries created the Bitcoin Energy Consumption Index to make the increasing energy usage and effects on climate change of bitcoin mining and transactions known by its users.
“The purpose is to inform people about the energy footprint of the network,” he said. “Ultimately, if you are a bitcoin user you are not the one paying for the electricity bills; the miners are. [Users] don’t really see the footprint of the system they’re using in a bitcoin transaction.”
The annual carbon footprint of all bitcoin is over 66 metric tons of carbon dioxide, according to de Vries’ index. This is a footprint comparable to that of Israel according to the index.
The index also catalogs the electronic waste that cryptocurrencies produce from frequent replacements to the high intensity computers used to mine bitcoin across the world. According to the index, bitcoin produces over 6 kilotons of electronic waste annually, comparable to electronic waste produced by a country the size of Luxemburg.
Disposing of electronic waste by way of burning can release harmful chemicals into the air that exacerbate the effects of climate change, according to climate.org,
The effects of climate change intensify when the energy used to mine bitcoin and other cryptocurrencies comes from non-renewable sources like fossil fuel combustion.
A 2020 Cambridge Center for Alternative Finance study estimated that only 39% of all energy used to mine bitcoin is carbon neutral.
“The leading sources [like Cambridge] have always indicated that the majority is coming from fossil fuels,” de Vries said.
He said that the areas that do use carbon neutral sources of energy do not use them year-round. For example, he said Chinese bitcoin miners utilized coal in the winter and hydroelectric power during the summer when it was more efficient before the practice was banned in the country.
“Bitcoin miners don’t just love cheap energy, but they also love constant sources of power,” de Vries said. “That tends to be a little bit complicated when you’re trying to combine that with renewable energy sources.”
Experts like de Vries see cryptocurrency in its current state as a detriment to the world’s environmental health. He said the system currently in place that involves massive mining operations is “extremely inefficient.”
“These systems grow by a lot. Bitcoin went from a negligible energy consumer several years ago to consuming as much energy as a country like Argentina now,” he said. “We’re now in a time where we need to actually reduce our energy consumption, and we also need to avoid carbon emissions.”
Multiple cryptocurrency mining organizations joined the Crypto Climate Accord—modeled after the Paris Climate Accord—with an ultimate goal of reducing the carbon footprint of mining. The Accord is supported by over 150 companies and individuals across the energy, finance and climate sectors.
The Accord incentivizes the use of alternative energy sources like solar and wind power to achieve carbon neutral energy consumption within cryptocurrency networks by 2030.
The system currently utilized for verification by most cryptocurrencies is known as proof of work. This is the energy-hungry method utilizing mining that de Vries’ index primarily focused on with bitcoin. He said the alternative could reduce energy consumption by 99.95%.
“Running on proof of work is extremely inefficient. But there are alternatives and they’re already being used without mining,” de Vries said. “The most popular alternative to that kind of system is called proof of stake. In these systems there is no incentive to use energy consuming hardware because your chance of winning depends on how much wealth you have rather than how much computation power.”
Proof of stake systems use a network of contributors that spend their own crypto in exchange for a chance to validate new transactions and earn a reward, according to Coinbase.
Proof of stake is utilized by currencies like Ethereum 2.0 as a faster, more energy efficient and environmentally friendly method of decentralized currency.
“If you run a cryptocurrency on such an algorithm it doesn’t have to be a threat for climate change,” de Vries said. “I don’t see renewable [energy] so much as a solution for it. I think the best solution is to make that change from proof of work to an alternative like proof of stake. Because then you don’t need that hardware at all anymore. You solve not just the energy use, but also the electronic waste issue.”