Coming Soon Or A Bridge too Far?

Bitcoin is a product of the 2007-8 global financial crisis that was brought about by central banks and financial institutions making digital or “virtual” deals in money they did not actually own. Post-crisis trust in sovereign and central authorities was severely undermined giving rise to the need for a new class of financial assets free of government control.

One might call it a ‘democratic’ financial asset created ‘by the people for the people’ based on secure technologies rather than sovereign or institutional trust.

Humble beginnings had the market value of the first bitcoins mined in 2008 pegged close to US$0. However, the believers persevered, and the currency slowly gained strength. The first bitcoin commercial transaction occurred in May 2010 when Mr Laszlo Hanyecz from Florida bought a pizza paying 10,000 bitcoins. In today’s bitcoin dollar value that amounts to over US$240 million – that’s a lot of dough.

In the last 10 years, bitcoin has outperformed every other investment class by many orders of magnitude. Today, it is a global buzzword and the ‘go to’ destination for new investment dollars. However, what is not highlighted to investors, and the public at large, are the environmental consequences that widespread use of crypto currencies will bring.

BITCOIN AND THE ENVIRONMENT

Bitcoin is a digital currency, that means it is paperless, which in turn would imply that it’s good for the environment as less trees would be cut. However, this line of reasoning does not stand up to closer scrutiny. Like most cryptocurrencies in existence today, bitcoin is based on peerto-peer (P2P) networking and blockchain technologies. Bitcoins are produced by very specific types of computers that attempt to be the first to find a solution to a given complex mathematical problem. This computation process is called

Sunil Thakur, Staff Writer, SME

‘mining’. Every successful computation or ‘block’ created by a miner, has to be validated by all computers on the bitcoin network every time. Once a block is validated it is immutable and can never be changed – ever. This fundamental feature makes blockchain’s security protocol unbreakable.

However, the intense computing competitions across the bitcoin network consume vast amounts of electricity with thousands of dedicated machines running 24x7 to execute bitcoin transactions and produce new bitcoins. Just how energy intensive are these machines?

Let’s find out.

It may be interesting at the outset to note that the huge amounts of computation and subsequent energy consumption involved in a blockchain are not a bug in the system but a key feature of its operation and security. There is no direct way to calculate how much energy is consumed by a given cryptocurrency network, but reasonable estimates can be arrived at using metrics like the number of calculations done per second and the energy consumption parameters of the machines doing the calculation.

At the time of writing, the Cambridge Bitcoin Electricity Consumption Index gives us an estimated average annualised consumption of 97.3 TWh/year for the bitcoin network – and this is only for the bitcoin network. All the other networks producing all the other types of coins like Ethereum, Litecoin, etc. are not accounted for here.

Another bitcoin electricity consumption index published by the Digieconomist puts this figure for bitcoin at 131 TWh/year and equivalent to an annual emission of 73 million tonnes of carbon dioxide. The above numbers are more than the annual energy consumption and greenhouse emissions of entire small countries like the Czech Republic and the Netherlands.

Bitcoin Vs Card And Cash

According to industry estimates, a single bitcoin takes about 1446 kWHs of electricity to produce. To put things in perspective, this is equivalent to the amount of electricity consumed by the average

US household over a period of 50 days.

By contrast the Ethereum cryptocurrency fairs a little better on the environmental front with each transaction consuming ‘only’ 188 kWHs per transaction. In both cases however, most of the electricity used is generated by highly polluting thermal plants.

On the other hand, the global banking industry consumed 200 TWhs to process 482.6 billion non-cash transactions in the year 2018. The average electricity footprint for processing these transactions was 0.4 kWh at most. Compared to cash bitcoin fares a much better but is still far behind in environmental terms. According to a 2021 Tufts University study, the environmental cost of every US dollar in circulation was US$0.007 whereas for “paperless” bitcoin the environmental cost stood over three times more at US$0.023.

Renewable Energy

Some have argued that renewable energy can be used for bitcoin mining operations. However, presently renewables pose a challenge as the energy from windmills and solar farms is not 24x7 while data mining operations are 24x7x365. Before the Chinese ban on cryptocurrency mining in May 2021 almost 40% of the world’s mining was done from the Sichuan province where hydroelectric power is available widely and cheaply. But even here a report by China Water Risk explained that hydroelectric power cannot be produced at the same rate all year round with power generation falling sharply in the dry months.

Electronic Waste

The average working age of a crypto-mining machine is about 1.5 years. What is known as ‘Koomey’s Law’ in computer hardware suggests that the most cost-efficient mining machines can remain economically viable for no more than 18 months as new, faster more efficient machines are continuously being manufactured and the number of computations that can be completed per kilowatt-hour of electricity as consistently doubled about every 1.5 years.

According to the Digiconomist, Bitcoin Energy Index data mining operations produce roughly 37,000 tonnes of electronic waste every year. As more and more miners get into producing bitcoins the number will only surge in the future.

Future Outlook

The maximum number of bitcoins that can be mined is capped at 21 million by the algorithm. In the last 10 years and as of January 2022, 18.9 million bitcoins have already been issued, with about 2.1 million bitcoins still to be released. However, bitcoin mining is not about to end anytime soon. According to estimates at the current rate the last bitcoin won’t be minted before 2140. This is because the level of complexity and difficulty in producing a bitcoin has been increasing exponentially over time.

As an alternative to the current proofof-work method of validating and mining bitcoins the proof-of-stake method is an alternative cryptocurrency mining method that does not use computing power as extensively. In the proof-of-stake concept the authority to validate transactions and operate the crypto network is instead granted based on the amount of cryptocurrency that a validator has “staked” or agreed not to trade or sell. This mining method can bring down energy costs by over 99% if implemented right.

Other less popular methods of validation, proof of elapsed time, proof of burn, and proof of capacity are also in development. Ethereum developers have already made announcements that they will switching to the proof-of-stake method soon. The bitcoin network, however, has not made any such plans public as of today.

The chickens will soon be coming home to roost and all the excitement and buzz around bitcoin may come to a quick and messy end if cryptocurrency technologies don’t clean up their act to quickly become more scalable and sustainable in the near future.