Bitcoin's Environmental Impact: A Balanced Perspective

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Bitcoin has an energy problem. But is it solvable?

Bitcoin's (BTC) high carbon consumption has dogged the currency for years. Even before Elon Musk announced Tesla would stop taking Bitcoin payments on the back of environmental concerns, many people complained the leading cryptocurrency was consuming as much energy as a medium-sized country each year.

But Bitcoin enthusiasts are hitting back. Let's don our hard hats and get into the nitty-gritty of Bitcoin mining. Here are both sides of some common arguments.

1. You need to put Bitcoin's carbon consumption in context

What Bitcoin's defenders say

Bitcoin bulls argue that it's all a question of context. If you accept that Bitcoin has the potential to transform the way money works, then Bitcoin may actually reduce energy consumption. As Don Wyper, COO of DigitalMint, told The Independent, "If Bitcoin can become the digital currency it was initially envisioned, we'll need to consider all the electricity consumed via currency creation, destruction, transmittance, securitisation, loss, etc."

When analysts at Galaxy Digital compared Bitcoin with the banking and gold mining industries, the popular crypto came out ahead. According to Galaxy Digital's recent report, Bitcoin consumes around half the energy of the gold and banking sectors individually.

What Bitcoin's critics say

Bitcoin hasn't replaced the gold or banking industries -- in fact, both sectors are thriving. That means Bitcoin's energy consumption actually comes on top of the existing consumption of the other industries.

In addition, critics argue that Bitcoin's high energy consumption is built into its DNA. For Bitcoin to remain secure and to validate its transactions, it uses the proof-of-work mining model. This is central to Bitcoin's security and also controls the production of new coins.

Without getting too technical, miners have to be the first to solve a complex mathematical problem to create a new coin. As Bitcoin's price rises, companies will invest in more computing power to solve this mining puzzle. But that puzzle will become more complex to ensure that only one coin is mined every 10 minutes on average. This zero-sum game means that the more mainstream Bitcoin becomes, the more energy it consumes.

2. Bitcoin is reducing its carbon footprint

What Bitcoin's defenders say

China closed down many coal-intensive Bitcoin mining farms in May. Not only did this immediately halve the computing power used for mining, it also meant many miners relocated to areas with a lot of renewable energy.

The argument is that it's in miners' interests to find the cheapest source of energy, and, increasingly, one that's renewable. It's difficult to know how this will play out, but right now it seems that a number of miners have moved from China to the U.S. -- and many of those are focusing on renewable energy sources.

Musk said in July that Bitcoin mining is trending toward increased renewable usage. He added that Tesla would accept Bitcoin payments again if half of mining energy usage comes from renewable sources.

What Bitcoin's critics say

Critics hit back at this argument on two fronts:

• If Bitcoin mining uses renewable energy, it's taking it from another industry. Right now, according to the U.S. Energy Information Administration, only 20% of the electricity generated in the country is renewable. If Bitcoin sucks up large amounts of that supply, other industries will be forced to use nonrenewable energy sources.
• There's a cost in electronic waste because Bitcoin mining requires specialized hardware. According to Alex de Vries, who tracks cryptocurrency's energy consumption, Bitcoin mining requires specialized hardware. He told The Verge that, on average, these specialized machines only last a year and a half, after which they get thrown away because they can't be repurposed. The hardware cost of each Bitcoin transaction is like throwing away an iPhone mini.

3. Bitcoin could incentivize increased renewable consumption

What Bitcoin's defenders say

ARK Invest, which focuses on disruptive innovation, recently published a paper arguing that Bitcoin mining could accelerate the transition to renewable energy.

One issue with solar and wind power is that the supply is intermittent and peak supply doesn't always coincide with times of high demand. ARK's paper suggests that Bitcoin miners "offer highly flexible and easily interruptible load." (An interruptible load is an end use of electricity that can be switched on or off quickly.) Combined with the investment in storage projects, miners could help to balance out supply and demand issues and, in doing so, make renewable energy production more profitable.

What Bitcoin's critics say

De Vries disagrees. He points out that Bitcoin miners actually need a constant supply of power -- it isn't economically viable for them to switch off machines for any period of time. In addition, it doesn't solve the environmental cost of the specialized hardware we touched on above.

4. There are plenty of more environmentally friendly cryptocurrencies

What Bitcoin's defenders say

Bitcoin bulls argue that Bitcoin is unique. The first-ever cryptocurrency has an unparalleled community. Its price and market capitalization is streets ahead of its competitors, so much so that other coins will always be playing catch up. And the same proof-of-work model that causes the environmental problems is what keeps the network so secure.

What Bitcoin's critics say

Bitcoin is not the only cryptocurrency. Indeed, many more eco-friendly cryptos offer the benefits of blockchain at a significantly reduced environmental cost. Bitcoin's little sister, Ethereum (ETH), is in the process of moving to a more sustainable mining model. And Charles Hoskinson, the founder of Cardano (ADA) says it is 4 million times more energy efficient than Bitcoin.

Bottom line

Bitcoin could make a huge difference to the world we live in -- for example, by offering banking services to the 2 billion people around the world who aren't able to open bank accounts. Unfortunately, that positive social impact comes at a significant environmental cost.

As Bitcoin investors continue to weigh environmental, social, and corporate governance, the potential for Bitcoin to grow the renewable energy industry could count in its favor. But with so many other eco-friendly cryptocurrencies on the market that solve many of the same problems, it is difficult to defend Bitcoin's carbon footprint.

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