Ask a cryptocurrency enthusiast where digital currencies are headed, and you’ll hear that Bitcoin is poised to revolutionize the financial system as we know it. Ask a crypto skeptic? It’s all glorified gambling.
But no matter where you fall on crypto’s future, there’s no debating that the digital currency has a decidedly real-world impact on the climate.
Bitcoin—the world’s oldest and most popular form of cryptocurrency, with a total market value that topped $1.3 trillion—now eats up half a percentage point of all the electricity consumed in the world. That puts it on par with the usage of the entire country of Sweden. In fact, Google could power all of its global operations on that amount of energy, seven times over. In comparison with more traditional online banking, a single bitcoin has the same carbon footprint as 330,000 credit card transactions.
Given the world’s exceedingly tight timeline to reach net-zero emissions and avoid a climate catastrophe, the crypto boom poses a big problem.
So what, exactly, makes crypto such an energy-intensive endeavor?
Making Sense of the Blockchain
Crypto’s massive carbon footprint stems from the mind-boggling computing power required to carry out the buying and selling of crypto coins across the network.
To explain, we’ll need to get a little technical.
Fiat money—the everyday kind backed by the federal government—is tracked carefully on databases by financial institutions like banks and has been for more than a century. But in the wake of the 2008 financial crisis, trust in the financial system (and the government agencies tasked with regulating it) bottomed out and sent disillusioned techies looking for another, more populist solution.
Cryptocurrencies like Bitcoin offer up an alternative: Instead of requiring a centralized authority to approve and track the movement of money, every Bitcoin transaction gets logged on an anonymous, online public ledger that’s maintained by a sprawling network of computers. It’s this public ledger, called the blockchain, that’s at the crux of crypto’s energy problem.
In order for Bitcoin to remain legitimate, it’s important that only valid transactions are recorded. This prevents users from spending bitcoin they don’t really have or spending it more than once. Simply logging the transactions wouldn’t be secure enough, so before a block of transactions can make it onto the ledger, the network requires a complex mathematical equation to be solved.
Any user on the network, not just the person carrying out the transaction, can solve the equation, and the owner of the computer that solves it is rewarded with a portion of a Bitcoin—which has real-world value because it can be cashed in for U.S. dollars or other currencies. (At the time of publication, a single bitcoin was worth a hefty $38,000—and its value, though historically volatile, appears to be climbing.)
Those willing to put their computer to use validating transactions—a computationally intense trial-and-error process that pits computers against one another in a race to solve equations—can make a lot of money. This activity is known as “mining,” and the people doing it are “miners.”
Mining is not the only way Bitcoin can make people money. Average investors are buying Bitcoin in hopes that its value will continue to rise so they can turn a profit. “In the beginning, I think there was a different idea,” says NRDC finance expert Alfonso Pating, who worked in crypto before coming to NRDC. “For a cryptocurrency to exist, there had to be a utility for these coins, but now we see the shift into people creating tokens for the sole purpose of trading and speculation.”
This speculative market has caused a veritable gold rush, albeit one that some predict will soon burst. “The unregulated and fly-by-night issuances of some cryptocurrencies make it seem almost like lottery ticket buying,” says Todd Phillips, the director of financial regulatory and corporate governance at the Center for American Progress.
This huge influx in buying and selling all over the world has led to “mining rigs,” which are warehouses full of computers that handle Bitcoin transactions. And all that processing is causing these facilities to consume lots and lots of electricity.
Can Crypto Go Green?
Phillips isn’t optimistic about the ability or willingness of governments to regulate their way out of crypto’s climate problem.
Some countries—like China, where the majority of mining took place before the government ordered the facilities to close last year—have clamped down on the industry, but operations simply moved to countries with cheaper energy and fewer rules. Now, more than a third of crypto mining is happening in the United States, up from just 4 percent in September 2019. “If [miners] were being hindered in any way in the United States, they’d say, ‘Well, we might as well ship our operations somewhere where they have more lenient government policies,’” Pating says.
But change may be on the horizon for the U.S. crypto mining landscape.
Right now, most cryptocurrencies remain unregulated as financial assets under the U.S. Securities and Exchange Commission (SEC), and because of this, “their prices are frequently manipulated, market participants are too often defrauded or simply exploited, assets are stolen outright, and taxes owed are often not reported, let alone paid,” says a recent report on crypto regulation from the Center of American Progress. If cryptocurrencies were legally designated as investment securities, the agency could take proceeds away from the people issuing them. “I think that would stop the speculative mania to some extent,” Phillips says.
Cryptocurrencies could also shift away from their current energy-intensive method of verifying transactions–from what’s currently dubbed a “proof of work” model, which pits computers against one another in a race to win coins, to a “proof of stake” model, which doesn’t require continual competition and significantly cuts down on energy use.
It’s likely legally difficult for governments to outlaw “proof of work” infrastructure, but there are ways the government could incentivize switching over to the less computationally intensive (and therefore less carbon-consuming) verification process. The switch, however, would require significant structural changes to the network.
While the task at hand seems large, the crypto community does appear to be reading the room.
Currently, fossil fuels power about 60 percent of Bitcoin mining. In 2021, a group of more than 150 crypto companies signed the Crypto Climate Accord, in which they promised to reach net-zero emissions by 2030 through both switching over to renewables and purchasing offsets. But offsets often come with big asterisks on their true effectiveness at preventing carbon emissions and renewable energy could be better used for essentials, such as powering homes or transporting food.
“Personally, I think the quintessential question for crypto, or for the majority of it, is its existence overall.” Pating says. “Is it truly necessary?”
Crypto as Art Form
The same existential question is often asked of NFTs (non-fungible tokens), another bizarre digital trend that makes use of the same computing-intensive blockchain as crypto and, in recent years, has rocked the art world.
NFTs are pieces of digital art, like an image or video, that have been stamped with a unique fingerprint in the form of a string of code. By purchasing an NFT, collectors can then “own” one-of-a-kind pieces of artwork—and sometimes for similarly exorbitant prices as real-life artworks. But because this stamping process relies on carbon-intensive blockchains, creating a single NFT produces the same amount of greenhouse gases as a 500-mile road trip. That’s a steep climate cost for what appears to be largely an intellectual exercise.
“It’s not that you are buying an image, because you’re actually just buying the link to an image,” Phillips says, “and there are usually no copyright protections that are transferred when you buy an NFT, because the blockchain has no relation to the legal system. It’s insane to me that people are spending money on these things.”
Phillips remains baffled on how best to tackle these problems—and unsure where the industries are headed, especially given how unpredictable they’ve been since the start. “Despite the fact that there’s so much fraud, the abuse isn’t going to go away as long as so much money remains on the table,” he says.
Pating’s prediction? “Even though people like to say Bitcoin will be tapped out at 21 million bitcoin, nobody really knows what’s going to happen,” he says. “I think it’ll get a lot bigger—much, much bigger.” And so will its impact on the physical world.
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