Bitcoin and other cryptocurrencies have been slated as the future of finance. But does that future come at a high price for the world’s sustainability goals. Rapid growth in unregulated crypto mining could contribute to energy markets’ disruptions and divert resources from the electrification of other sectors, particularly in emerging markets according to Fitch Ratings. The increase in global demand for cryptocurrencies in 2021 and highly profitable crypto mining have created ecosystems that already consume an estimated 0.4–1 per cent of global electricity.
A single bitcoin transaction requires 1,695 kWh of electricity, about what an average US household uses in 58 days, according to Digiconomist, a platform managed by Dutch economist and blockchain expert Alex de Vries. That same transaction produces 805 kilos of carbon dioxide, equivalent to the carbon footprint of 1.8 million Visa transactions de Vries estimates. Bitcoin enthusiasts have long maintained that bitcoin mining could drive a clean energy transition.
“The proof-of-work (PoW) consensus algorithms (the mathematical problems that Bitcoin miners must solve) that power the Bitcoin network do indeed require a lot of energy,” Stephen Stonberg, chief executive officer, Bittrex Global, says. “But what these arguments about Bitcoin’s environmental impact obscure is that the broader crypto ecosystem is in the midst of a shift towards a cleaner, greener, more sustainable future that will result in significantly lower carbon emissions. This can be seen with the launch of Ethereum 2.0 and the move from a PoW consensus to a proof of stake model (PoS).”
Proof of work or proof of stake
Back in 2009 when Satoshi Nakamoto built the first ever cryptocurrency, bitcoin, he needed a mechanism to verify the transactions without utilising a third party. His answer was the PoW system. PoW is used to determine how the blockchain reaches consensus. In other words, how can the network be sure that the transaction is valid and that someone is not trying to circumnavigate the system? To achieve this, he made use of an advanced form of mathematics called cryptography – hence the moniker cryptocurrencies.
Cryptography uses mathematical equations that are so difficult that only powerful computers can solve them. No equation is ever the same, meaning that once it is solved, the network knows that the transaction is authentic. But this high-power computing needs a lot of equipment and a
a lot of electricity.
Because of this, the search was on for other consensus mechanisms that were seen as more sustainable, with one of the most popular being the PoS model that was devised in 2012 by two developers called Scott Nadal and Sunny King. PoS makes the consensus mechanism completely virtual.
While the overall process remains the same as PoW, the method of reaching the end goal is entirely different. In PoW, the miners solve cryptographically hard puzzles by using their computational resources. In PoS, instead of miners, there are validators. The validators lock up some of their Ether as a stake in the ecosystem. Following that, the validators bet on the blocks that they feel will be added next to the chain. When the block gets added, the validators get a block reward in proportion to their stake.
“We are already seeing the results of what we can expect from PoS, with the Ethereum network consuming almost 100 Twh less than the Bitcoin network,” Stonberg adds. “Ethereum is hardly alone in this consensus revolution, with ascendant, next-generation blockchains like Cardano, Polkadot, EOS and Cosmos each implementing their own versions of PoS. But even if we put aside these developments and focus strictly on the assertion that crypto is a threat to the planet, it is important to distinguish the sources of energy that crypto miners use, with data indicating that most of the electricity used for crypto mining comes from renewable sources.”
Moving to renewable energy
Despite increasing transparency and research on the environmental impact of PoW mining, the topic is still typically misrepresented in most sources and on both sides of the debate. According to the latest research from the Cambridge Centre for Alternative Finance (CCAF) a significant majority of Bitcoin miners (76%) use renewable energies as part of their energy mix. However, the share of renewables in Bitcoin miners’ total energy consumption remains at 39%.
Hydropower is listed as the number one source of energy, with 62% of surveyed Bitcoin miners indicating that their mining operations are powered by hydroelectric energy. Other types of clean energies such as wind and solar rank further down, behind coal and natural gas, which respectively account for 38% and 36% of respondents’ power sources.
The billion-dollar question is can bitcoin switch from fossil fuel to renewable energy? “Renewable energy production is inconsistent and difficult to store,” Rahul Singh, president, HCL Technologies, says. “However, some nations have a clear advantage. Paraguay, for example, has an energy supply based almost 100% on hydroelectric sources. This means bitcoins mined in Paraguay, which also has the highest per capita percentage of renewal energy, will have a lower carbon footprint than bitcoin mined in nations dependent on fossil fuel. For this reason, Paraguay believes it can become the crypto hub of Latin America.
“The need to mainstream bitcoin is likely to accelerate research into reducing the cost of storing renewable energy as well. Additionally, the tentative steps being taken by governments to turn bitcoin into legal tender could potentially lead to well-considered policies for mining cryptocurrencies and penalising breaches of environmental norms. To counter critics of cryptocurrency, an oft-repeated argument is that the carbon footprint of fiat money is not low, either. Fiat money has a secondary impact through maintaining thousands of bank branches, employees using fossil-fuel based transport to reach these offices and more than 3.5 million ATMs worldwide soaking up power 24/7.”
Under this scenario, it is easy to see how renewable energy can grow, but the actual test is how much fossil fuel generation it displaces.
Another factor to consider is that crypto miners are increasingly using excess electricity that would otherwise go to waste. “The emergence of crypto mining farms has soaked up extra capacity and prevented the waste of unused renewable energy,” Stonberg continues. “It is also important to note that the traditional international financial system requires significantly more energy than the Bitcoin network. All the disparate parts that make up the whole of the global banking network – banking data centres, card network data centres, ATMs, and bank branches – use a lot of energy. In fact, the traditional financial sector provides financing for some of the most environmentally damaging projects on Earth.”
Unique energy buyers
Bitcoin miners are unique energy buyers in that they offer highly flexible and easily interruptible load, provide pay out in a globally liquid cryptocurrency, and are completely location agnostic, requiring only an internet connection. According to the Bitcoin Energy Initiative these combined qualities constitute an extraordinary asset, an energy buyer of last resort that can be turned on or off at a moment’s notice anywhere in the world.
According to its 2021 White Paper Bitcoin miners are an ideal complementary technology for renewables and storage. Combining generation with both storage and miners presents a better overall value proposition than building generation and storage alone. There will always be physical limitations to how much energy can be cost effectively stored without dissipation. However, the daily intermittency challenge can be met entirely with just a few hours of storage capacity.
By combining miners with renewables and storage projects, the Bitcoin Energy Initiative believe it could have a threefold benefit. First it would improve the returns for project investors and developers, moving more solar and wind projects into profitable territory. Secondly, it would allow for the construction of solar and wind projects even before lengthy grid interconnection studies are completed (as Bitcoin miners can offtake the energy until selling to the grid becomes possible). Finally provide the grid with readily available excess energy for increasingly common black swan events like excessively hot or cold days when demand spikes.
There are two large implications if Bitcoin mining becomes normalised as an energy buyer of last resort. First, the amount of solar and wind energy on the grid could increase dramatically. There is currently >200 GW of delayed solar and wind capacity in the interconnection queues of just three US electricity markets. For context, which is approximately double the amount of solar and wind capacity currently installed there. The second major potential impact could be a sizable transformation and greening of the Bitcoin mining industry.
The Bitcoin and energy markets are converging and the energy asset owners of today will become the miners of tomorrow. Utility executives, sustainable infrastructure funds, and grid-scale storage developers are well-positioned to expedite this future by aligning their strategic roadmap and deploying large scale investments into the emerging synergy between Bitcoin mining and clean energy production.