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The Hidden Costs: Understanding the Environmental Footprint of Crypto Currency

January 27, 2022
tags:#Cryptocurrency, #blockchain, #bitcoin, #energy, #fossil fuels, #renewable energy
located:China, USA, Kosovo, Iran, Kazakhstan, Iraq, Russia
by:Gerardo Bandera
Over the past 10 years, the demand for cryptocurrencies has skyrocketed like very few other trade commodities. Today, the total cryptocurrency market cap has reached over three trillion dollars and the price for Bitcoin in early 2022 was nearly double what it was a year prior. The increase in price for these online currencies has prompted hysterical demands, encouraging millions of people to try their slice of the crypto pie - without understanding, or considering, the collateral environmental impact. Many social and environmental activists have called out that cryptocurrency is detrimental to the environment and has a high carbon footprint.

Why is cryptocurrency bad for the environment? 

Cryptocurrency’s main environmental impact comes from the energy-intensive activities used for each transaction and for “mining” new coins. The energy required differs between cryptocurrencies, some of which (as we will see later below) require very little energy, while others, like the most popular - Bitcoin - are incredibly energy intensive. 

It is estimated that each Bitcoin transaction uses around 2100 kilowatt hours (kWh), which is roughly what an average US household consumes in 75 days. When this energy is supplied from non-renewable energy sources, cryptocurrencies like Bitcoin can generate exorbitant greenhouse gas emissions. Bitcoin’s annual carbon footprint is comparable to the release of 97.2 megatonnes of carbon dioxide - roughly the annual emissions of the whole country of Argentina. 

What is bitcoin mining? 

In short, bitcoin mining is the process of creating, or ‘winning’, new bitcoins by solving increasingly difficult mathematical puzzles - a process called proof-of-work (PoW). While at its beginnings these puzzles could be solved with normal computers (CPUs), Bitcoin’s creator, Satoshi Nakamoto, designed a system where over time, as competition for bitcoin mining grew, the mathematical puzzles would become more difficult to solve. Therefore, over the past decade, as the price of Bitcoin - and the possible profit from mining them - has skyrocketed, better technology has become indispensable to solve these puzzles. 

Miners now use specialised computers, called ASIC systems, that are much more efficient per attempt (or hash) of the puzzle - therefore increasing the likelihood of being the first to solve the puzzle and reaping the newly mined bitcoin, but also increasing the amount of energy required to power these computers.

ASIC systems, although more energy efficient than normal computers, require more electricity since they are typically kept running incessantly, and also require energy to cool down the hardware to prevent from overheating, either with internal fans or with air conditioning. 

What’s the environmental impact of Bitcoin mining?

Higher processing power increases the likelihood of guessing the solution to the PoW, which has incentivised miners to either form mining pools, or to create mining farm facilities. In a mining pool, a collection of miners, each with their own power-intensive equipment, simultaneously attempts to solve the puzzle and then shares the profits depending on how much “effort,” or computing power, each miner contributed.

A mining farm, on the other hand is a data centre that consists of hundreds, sometimes thousands, of ASIC servers that run non-stop, continually mining for Bitcoins. While the consolidation of these servers into one place encourages a reduction of energy consumption, and the specialised ASIC hardware was designed to use energy more efficiently, these mining farms still require high amounts of electricity to power them.

In total, Bitcoin mining uses 91 TwH of electricity each year, which is about 0.5 percent of the world’s electricity consumption, more than the electricity consumed by all of Finland annually and seven times more than what Google consumes each year.

How to reduce the environmental impact of bitcoin mining?

Not all bitcoin miners have the same environmental impact. Two factors can contribute to a greener cryptocurrency mining: renewable energy sources and location climate. 

Bitcoin farms located in countries that rely heavily on fossil fuels have a higher environmental impact than those in countries that diversify their energy sources using hydropower, wind, solar or nuclear energies

Up until recently, a high percentage of Bitcoin farms were located in regions of China that relied heavily on burning coal, a relatively cheap energy source which encouraged profitability but also increased carbon dioxide emissions. In 2021, the Chinese government cracked-down on Bitcoin mining, causing an exodus of bitcoin miners to other locations with cheap energy sources. 

Kazakhstan, for example, has become a hotspot for Bitcoin mining due to low energy costs, generated by fossil fuels. However, the recent internet shutdown and protests in Kazakhstan have threatened the stability of mining in the region. On the other hand, farms located in places that use green-energy sources, such as those in Scandinavia, which use hydropower, have a drastically lower, or even neutral, carbon footprints. However, limitations on renewable energy availability, which can be subject to shifts in seasonality or production limitations, can dissuade miners from foregoing more reliable fossil fuel-based energy. 

Similarly, the climate around these data centres can have an effect on bitcoin mining’s carbon footprint, as those located in colder environments rely less on artificial cooling systems to prevent ASIC servers from overheating, and therefore reduce total energy consumption. 

How does cryptocurrency’s environmental impact compare to the banking system’s? 

In response to climate activists, defenders of Bitcoin point out that Bitcoin’s environmental impact is much less than that of the financial and banking sectors'. Indeed, one report states that Bitcoin uses less than half as much energy as the total banking system, whose largest energy consumption comes from its large data centres. 

While relative to the financial system, crypto's energy consumption hardly compares, it is important to note that, since cryptocurrency has hardly replaced traditional banking or financial systems, the energy used by crypto does not replace the banking system’s energy consumption, but is additional to it. 

Are there environmentally friendly cryptocurrencies? 

As mentioned, Bitcoin is detrimental to the environment due to the energy-intensive proof-of-work process that requires vast amounts of electricity to constantly power millions of servers. However, there are other cryptocurrencies that are not designed around the same mining creation as Bitcoin, such as Cardano, Nano and Chia. 

In response to criticism by activists, Ethereum - the second largest cryptocurrency - has hinted at changing its PoW system to a proof-of-stake (PoS) system, which randomly chooses one person at a time to solve the block, therefore reducing energy consumption by 99%.

The Social Cost of Cryptocurrency Mining

Apart from contributing to the deterioration of the environment and the advancement of global warming towards the dangerous 1.5 degree level, cryptocurrencies have also resulted in other social side effects.

Crypto mining has been known to threaten fragile energy grids in countries whose infrastructures cannot handle the power-chugging activity. Several cities in Iran, Kazakhstan, China and Kosovo have faced blackouts due to Bitcoin mining activities - leaving thousands of people without electricity and heat, sometimes for days.

Should crypto mining be regulated? 

In response to the threats to energy supplies, increasingly frequent blackouts, and environmental damage caused by crypto mining, several countries have already moved to ban cryptocurrencies altogether. China, Iran, Qatar, Morocco, Algeria and Egypt, among others, have formally outlawed cryptocurrencies and mining activities. While some of these countries have ostensibly justified their decision with concern for the environment, the underlying reason for others may be to protect their financial systems, especially in tight-fisted regimes like in China and Iran.

Kosovo recently became the first European country to ban cryptocurrencies altogether, and the Vice President of the European Securities and Markets Authority (ESMA), Erik Thedéen, recently called for broader regulation against PoW mining, especially as Europe faces an ongoing energy crisis and seeks to move towards renewable energies. Crypto mining regulation will surely be a pressing topic in 2022 as the world rearranges their energy sectors to meet climate agreements from COP26.  

Crypto as a humanitarian asset

Nevertheless, it’s important to note that cryptocurrencies also have the positive effect of supporting those who have been disenfranchised by the global financial system, of reducing the accumulation of wealth by the banking system, and of serving as a store-of-value for people in countries facing rampant inflation.

Many people in countries such as Venezuela, Argentina and Zimbabwe have turned to Bitcoin to protect their monetary assets from the devastating inflation that has reduced their purchasing power and ability to survive their countries’ economic crises. 

Bitcoin has also been used to oppose tyrannical regimes: In Russia, for example, the top political opponent of the Putin regime, Alexy Navalny, collected donations in Bitcoin to fuel his campaign, circumventing the government-owned financial system. In Belarus, a non-profit called BYSOL has received over $2 million worth of donations in Bitcoin to help activists defy the contested election of Lukashenko’s regime.

The decentralised nature of cryptocurrencies inherently protects these assets from being controlled or appropriated by governments and can be powerful tools for political dissent.

Image by: Kanchanara

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Gerardo Bandera
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China USA Kosovo Iran Kazakhstan Iraq Russia
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ASIC servers are specialised computers made specifically for cryptocurrency mining. Large fans prevent the hardware from overheating.
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Crypto mining farms use mass amounts of electricity to power warehouses of computers.
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