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Thursday, September 23, 2021

Bitcoin’s first victim: fiat currencies or the planet’s environment? 

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Bitcoin is receiving scrutiny for its large environmental footprint. 

With millennials pointing to cryptocurrency as the future of money while simultaneously campaigning for better environmental policies, some have questioned if the two goals contradict each other.

Unlike fiat currency, cryptocurrency uses a large amount of energy to operate. This is because the mining process requires intensive computing power.

US Senator Elizabeth Warren criticised Bitcoin, alleging that “it eats up more energy than entire countries.” 

In June, Elon Musk, viewed as a supporter of cryptocurrency, announced that Tesla would no longer accept Bitcoin as a payment method due to its environmental impact. This caused the price of Bitcoin to plummet. He revised his original stance a month later, tweeting that Tesla will accept Bitcoin as long as miners use clean energy.

The question remains, is cryptocurrency a contributor to the climate crisis, or could it be our unexpected saviour?

How is cryptocurrency mined?

The most significant factor contributing to cryptocurrency’s enormous energy consumption is the mining process. To generate a coin, miners need to solve complex mathematical puzzles. The mining process helps verify the legitimacy of transactions on the blockchain network. This is necessary as it prevents double-spending when someone uses the same coin twice, doubling their money.

Read also: NFTs: Why are memes selling for millions online?

The first miner to solve the puzzle is rewarded with cryptocurrency such as Bitcoin. This is an incentive to miners to compensate them for their efforts and allow more coins to enter circulation.

Why does mining use a lot of energy?

Miners rely on extremely powerful computers to win the race and become the first person to solve the puzzle. These require expensive graphics cards and significant energy consumption. Often, miners will have buildings full of computers working simultaneously to mine as many coins as possible. Such computing power has a toll on the planet’s natural resources.

This is a partially intentional process by creators of cryptocurrency. If mining a coin is cheap and easy, there’ll be a large supply of coins in circulation. If supply bypasses demand, the price of the cryptocurrency can plummet. To avoid this, cryptocurrencies are designed to require an enormous amount of energy, making the process costly and thus preventing a spike in supply. 

How much energy does Bitcoin consume?

So how much energy is consumed by millions of computers constantly running at maximum capacity?

Cambridge University estimates that Bitcoin alone uses 121 terawatt-hours (TWh) of electricity per year. If it were a country, it would be in the top 30 highest energy consumers.

The transaction of just one bitcoin uses 1544 kilowatt-hours (kWh). That’s almost equivalent to two months of the energy consumed by an average US household.

Some have criticised the Cambridge University study, with Don Wyper, COO of DigitalMint, calling it “misguided”.

“I think the latest University of Cambridge study is misguided, as bitcoin is acting as a ‘digital gold’ and therefore should be compared to the energy consumption of other store-of-value-assets… The gold mining industry consumes 475 million GigaJoules [131 tWh] worth of electricity annually.”

However, unlike gold mining, cryptocurrency is a digital process that does not require physically mining and transporting the currency. 

What’s being done to tackle Bitcoin’s energy consumption?

Earlier this year, China banned the mining of cryptocurrency altogether. It was estimated that 65% of Bitcoin mining took place in the country in 2020. Some activists have called on other countries to follow China’s footsteps.

Yet many claim that such measures are too extreme.

Instead, it’s believed that cryptocurrency will inevitably transition to use renewable energy due to its decreasing cost.

Miners operate as profit-driven businesses, with a goal to mine as much currency as possible with the lowest cost of operation. However, at its current state, renewable energy remains more expensive than traditional energy.

As a result, it’s estimated that Chinese miners will move their operations to Kazakhstan, which is geographically close and has lower electricity costs than most countries. However, unlike China which is the largest market for renewable energy, Kazakhstan heavily relies on non-renewable energy.

Can Bitcoin go renewable?

Despite the short term struggles, opportunities for clean cryptocurrency mining have spurred up across the world.

El Salvador may soon lead the world into clean Bitcoin mining. In June, the country became the first to accept the currency as legal tender. Its president, who Al Jazeera recently referred to as a “Bitcoin messiah”, has pushed for the usage of renewable energy in the country.

El Salvador’s President Nayib Bukele [Twitter]
Two months ago, he announced on Twitter that El Salvador will use renewable energy from volcanoes to provide a “100% clean, 100% renewable” hub for Bitcoin mining.

While Bitcoin requires intense computational power, several cryptocurrencies have also gained popularity for requiring less operational energy. They are viewed as an environmentally-friendly alternative to Bitcoin. Experts believe that the threat of other cryptocurrencies replacing Bitcoin may accelerate the currency’s transition to renewable energy.

Several global initiatives are currently underway to fuel the shift to clean energy. In December 2020, payment company Square, founded by Twitter’s CEO Jack Dorsey, announced a $10 million initiative to support companies contributing to the adoption of renewables in the industry. Additionally, The Crypto Climate Accord hopes to ensure that all Bitcoin operations run on renewable energy by 2030. 

Can Bitcoin help solve the climate crisis?

Such initiatives won’t only make cryptocurrencies environmentally friendly, but rather, they may help the world shift to renewable resources quicker than expected.

As more companies and countries create financial incentives for clean Bitcoin mining, the price of renewables may eventually drop below coal and other depleting resources.

As a result, we may see renewable energy achieve a mainstream presence due to the demands of Bitcoin miners. This concept is not new, though it’s gained popularity following recent initiatives that reward companies using clean resources.

While Bitcoin relies on significant processing power, it could help accelerate the use of renewable energy. Currently, that’s not the case, though recent measures may help catalyse this transition.

Do you think Bitcoin may help us solve the climate crisis? Or is the short term impact too harmful? Let us know in the comments.


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