Revolutionary democratisation of finance systems or climate-wrecking scam? Cryptocurrency is notoriously divisive. Millionaire backer, Michael Saylor has dubbed 2021 “the year that cryptocurrency really takes off”. We take a look at the potential environmental impact of cryptocurrency.
First things first, what the heck is cryptocurrency?
Cryptocurrency is a digital currency that is bought and sold online. Unlike traditional money, it is not paper-based, is not valued on another asset (e.g. gold) and is not controlled by financial institutions or governments. Instead, cryptocurrency is based on a decentralised system that uses blockchain technology to track transactions.
How does it work?
In simple terms, blockchain is a type of database. It stores information. Each ‘block’ contains data and new blocks are joined to the previous ones to form a chain. Blockchain technology was actually developed in the 90s but wasn’t widely utilised until ‘Satoshi Nakamoto’ (the anonymous inventor of Bitcoin) adapted it for their cryptocurrency in 2009. Blockchain was originally created to record data in a digital ledger and make it extremely difficult for those records to be altered in any way. With cryptocurrency, each block contains the data for a transaction plus a unique code or ‘hash’ like a fingerprint. It also contains the hash for the previous block in the chain, making it highly secure.
New coins are ‘mined’ by solving complex calculations. Investopedia explains that “bitcoin mining is the process by which new bitcoins are entered into circulation, but it is also a critical component of the maintenance and development of the blockchain ledger.” While most people acquire Bitcoin by buying it those who mine can ‘earn’ it without spending money. Miners are awarded bitcoin for finishing “blocks” of verified transactions, which are then added to the blockchain. There is a race to solve a difficult computation, with the first to complete it being rewarded with the bitcoin.
There are many players in the game but Bitcoin has dominated the market and the headlines. Litecoin and Ethereum are two of its main challengers in the market gaining traction and set to have a good year in 2021.
Over the years, attention has been raised about the possible environmental impact of cryptocurrency. We’re going to take a look at what its champions and naysayers have to say as well as diving into some of the arguments around climate change concerns.
What the supporters say
Support for cryptocurrency has sky-rocketed in recent years. The early hype dubbed this alternative money system as a way for the ‘average joe’ to buy and sell his way to millionaire status, without the generational wealth that set up traditional Wall Street players.
To those approaching things from a more social justice lens, what is perhaps most notable is that the decentralisation of power around money creates more resilient money and banking ecosystems, and it not as vulnerable to corruption.Â
It won’t shock you to learn that Bitcoin was created in 2009, hot on the heels of the 2008 financial crash that devastated global markets and sent much of the world into a recession. Public trust in banks was at an all-time low as we watched banks receive government bailouts despite their role in the recession at the same time ordinary people were losing their homes and unemployment rates soared. The world was looking for an alternative and cryptocurrency promised just that.
Another huge advantage that cryptocurrencies have other their counterparts is that they are completely anonymous. Ever had the feeling that your devices were listening to you? You mentioned to a friend that you were looking for a new car and all of a sudden you are seeing car ads every time you look at your phone? As we are spending more and more time online and using the internet for almost everything in our daily lives – from communication to banking to shopping – we are handing over data about ourselves with every click. This data is often sold to third parties who then use the information to advertise more effectively to us. You might remember this being explored in the 2020 Netflix documentary, The Social Dilemma, which had us all wondering whether we should just give up social media cold turkey and go back to those trusty old school Nokias. Using cryptocurrency allows consumers to remain unidentified and make purchases without leaving behind a data trail.
Cryptocurrency does not require paperwork in the way that the current banking system does. For some communities, opening a bank account can be inaccessible if they do not have a fixed address or the money to acquire an official ID like a drivers license or passport. This makes Bitcoin et al more appealing to those who feel excluded from the existing financial system.
Some other benefits that cryptocurrencies offer consumers are low to no transaction fees and rapid international payments, both common pain points that people tend to have with mainstream banks.
What the critics say
Unsurprisingly, many in the finance sector are not the greatest champions of cryptocurrency. The Bank of England Governor stated “I have to be honest, it is hard to see that Bitcoin has what we tend to call intrinsic value… It may have extrinsic value in the sense that people want it.” Because the value of bitcoin is not based on an asset like gold and exists only in digital form, this means that it is vulnerable to the volatility of the market. Although that can also be said of existing ‘official currency’. Rather than this highlighting the lack of ‘extrinsic’ value, this shortcoming is more accurately attributed to the link to investors attitudes.Â
When Billionaires weigh in…
Bitcoin has already demonstrated how it can be influenced by powerful billionaires. Elon Musk in particular has been vocal about his opinion and his flip-flopping has caused Bitcoin somewhat of a wild year. While Musk was a huge supporter in early 2020, buying $1.5bn worth and causing its value to spike just months later, he announced that his car company Tesla would no longer be accepting Bitcoin payments indicating concerns over its environmental impact.
In a statement, he shared his opinion that “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.” With stats like “a single Bitcoin transaction consumes more energy than 100 000 Visa transactions” and “cryptocurrency now uses almost as much energy as Argentina” circulating, his concerns are not unfounded.
Catastrophic environmental impact
The primary concern for environmentalists over cryptocurrency is the energy usage of the industry and the fact that the world is still mostly reliant on fossil fuels to produce that energy. Mining computers are much more powerful than personal devices and require vast amounts of energy to operate. The infrastructure, being completely digital, also requires energy to operate and to store data.
The calculations that the network creates for miners to solve have become increasingly difficult in order to avoid too many coins being mined and a subsequent slump in value. A number of sources claim that a single Bitcoin transaction generates calls for the same energy usage as the average US household uses in a month. The Cambridge Bitcoin Electricity Consumption Index has estimated that Bitcoin alone is responsible for 0.40% of the world’s total energy consumption. There are, of course, thousands of other cryptocurrencies currently in use. Digiconomist speculates that if Bitcoin was a country, it would outrank the energy usage of Colombia.Â
While this does set alarms bells ringing, it is notoriously difficult to calculate the true carbon footprint of cryptocurrencies because they are encrypted and untraceable.Â
A look at the counternarrative…
Popular YouTube channel, Coin Bureau, takes the most frequently shared statistics and breaks down some of the inaccuracies in an attempt to challenge the idea that cryptocurrency is detrimental to the climate and reposition it as a net positive.
In the video, the presenter looks at the Bitcoin Clean Energy Initiative, a white paper proposing that “bitcoin mining – in conjunction with renewable energy and storage – is especially well suited to accelerate the energy transition.” Wind and solar power both pose a similar challenge when it comes to consistent energy supply – they are heavily dependant on the weather. The sun does not shine 24/7, nor does the wind blow all day. This means that there are periods of high energy abundance and periods of next to none. In times of high energy, the grid is not always able to make use of the electricity produced and it can go to waste. The white paper suggests that bitcoin miners, being particular heavy energy-intensive, can use the surplus energy and then invest the income back into further developing the clean energy industry. The presenter goes on to state that there is some evidence to suggest that as much as 78% of the energy used by Bitcoin is from renewables cited statistics from sources like Deutsche Bank Research and the Chinese National Energy Agency.
What about the current state of affairs?
It’s also worth considering the impact of traditional banking to provide some important context for all of this. If cryptocurrency is going to be a viable alternative, we need to understand the impact of our current model to assess whether it would actually be an improvement. When comparing cryptocurrency networks to the traditional banking infrastructure, you need to look at the full picture. This includes central offices, bank branches and ATMs – all of which consume electricity.
This Medium blog attempts to calculate the carbon footprint of the traditional banking infrastructure. Though it lacks to cite resources for each calculation, it poses some reasonable arguments and raises some thought-provoking questions about the true impact of an industry as vast as finance.
In conjunction with the carbon emissions generated by the banking industry’s operations, it is also contributing to climate change in another way – through investing. It is important to acknowledge that the 60 biggest banks in the world have provided $3.8tn of financing for fossil fuel companies since the Paris climate deal in 2015. A report by a coalition of NGOs shows an upward trend despite global pledges to tackle climate breakdown.
A commitment to be net-zero by 2050 has been made by 17 of the 60 banks, but the report describes the pledges as “dangerously weak, half-baked, or vague”. “When we look at the five years overall, the trend is still going in the wrong direction, which is obviously the exact opposite of where we need to be going to live up to the goals of the Paris Agreement. None of these 60 banks have made, without loopholes, a plan to exit fossil fuels,” said Alison Kirsch, author of the report at Rainforest Action Network. It’s one thing to be energy-intensive, it’s quite another to invest specifically in climate-wrecking fossil fuels.
Parting thoughts
While it’s clear that cryptocurrency remains an energy-intensive system, it does seem that the panic about its contribution to the climate crisis has been somewhat sensationalized in the media, heightened further by criticism from the banking industry. As Coin Bureau demonstrated, some of the statistics being used to argue against cryptocurrency are flimsy and based on assumptions.
A true side by side comparison of traditional banking and cryptocurrency is not currently possible. While banks are contributing to carbon emissions through their operations and their investments, cryptocurrency has much smaller operations and emissions are primarily generated through energy usage – which can be powered by renewables. Additionally, there are some positive moves towards accelerating the renewable energy infrastructure in the crypto community. Conversely, the established finance industry is dragging its heels and continuing to funnel billions into fossil fuels.
If you are seeking an alternative money system to the establishment, where you can remain anonymous – cryptocurrency offers a great product. However, if you are looking to reduce your carbon footprint it’s not yet clear whether cryptocurrency is the best option for that. Switching your financial products like bank account and insurance to ethical providers that invest in green business, might be a better starting point while the jury is still out on the true environmental impact of cryptocurrency.