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Is Cryptocurrency Actually Bad for the Environment?

Drew Fossen Drew Fossen
21st May 2021
Is Cryptocurrency Actually Bad for the Environment?
Proof-of-Stake will mitigate environmental issues (Getty Images).

During the last few months, cryptocurrency has made headline after headline, with stories emerging of crypto turning average people into Dogecoin millionaires. Other stories focus on big-time investors entering the crypto space as some of the world’s richest companies like Tesla, PayPal, Square, and Microstrategy have made significant investments in Bitcoin.

As more people start to learn about crypto, concerns have arisen about its impact on the environment and its energy use. Numerous articles have emerged similar to this article from the New York Times, claiming that “Cryptocurrencies Use Lots of Energy.”

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A common source featured in all of these articles is the University of Cambridge's Bitcoin Electricity Consumption Index. The Index states that Bitcoin consumes about 133.68 terawatt-hours per year, which is more energy than entire countries like Sweden and The Netherlands consume annually. 

However, these articles fail to make it clear that there are different ways to mine cryptocurrency and that less energy intensive cryptocurrency-mining methods are on the rise. The two most popular ways that cryptocurrencies are mined are Proof-of-Work (PoW) and Proof-of-Stake (PoS). 

Proof-of-Work involves using very sophisticated computers that solve extremely complex math problems. By being the first to solve these math problems, miners verify transactions and the transactions are added to the blockchain. The miner that solves the math problem first is rewarded for their work with a cryptocurrency such as Bitcoin. Because it is a race to solve the math problem, miners with the best equipment and most computing power will win. In the beginning of cryptocurrency, miners were able to compete for rewards with a regular at-home computer. As more and more miners have entered the game, attempting to win the reward and solve the problem first, the need for better equipment has increased, along with energy use. Today, instead of regular computers being used to mine cryptocurrencies like Bitcoin, there are entire data centers dedicated to mining Bitcoin and other cryptocurrencies. As the price of Proof-of-Work coins increase, so does the amount of energy needed to mine them.

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A few examples of Proof-of-Work cryptocurrencies that use this increasingly energy intensive mining process are Bitcoin, Ethereum, Dogecoin, Litecoin, Monero, and Zcash. 75% of the mining of Bitcoin is done in China, whose economy is still heavily reliant on coal.

Proof-of-Stake cryptocurrencies use far less energy than Proof-of-Work and are gaining in popularity. Proof-of-Stake allows miners to validate transactions based on the amount of coins they hold. The larger amount of coins that a miner holds (stakes) on a specific network, the larger the amount of mining rewards they will receive. This model eliminates the need for any fancy computers or hardware.

One benefit of the Proof-of-Stake model is that as the price of a Proof-of-Stake coin increases, the energy consumed by the network remains the same. As the price increases, the security of the network actually increases as well, because the value of the cryptocurrency being held (staked) has increased.

Ethereum, the second largest cryptocurrency after Bitcoin, is just “months” away from shifting from Proof-of-Work to Proof-of-Stake, which would slash its carbon emissions by 99%, the project has announced. This means that Ethereum would go from using 5.13 gigawatts of power (around the consumption of Peru) to just 2.62 megawatts of power per year (around the consumption of 2,100 American homes). Ethereum provides the infrastructure for many other crypto projects, meaning that after this switch from Proof-of-Work to Proof-of-Stake all of the projects built on Ethereum would be using Proof-of-Stake as well.

Most articles addressing the concerns of cryptocurrency and the environmental impact only mention the environmental impact of Bitcoin, which currently makes up less than half of the cryptocurrency market. Bitcoin has been losing more and more of its market share to environmentally friendly Proof-of-Stake crypto projects over the last few months as many investors see that Proof-of-Stake is a more sustainable alternative. This has also led to a massive increase in the price of Ethereum, as many investors anticipate Ethereum’s move from Proof-of-Work to Proof-of-Stake.

In April 2021, Founder of Twitter, Jack Dorsey released a memo through his fintech company, Square, in collaboration with Cathie Wood’s Ark Invest. This memo claims that Bitcoin will actually drive renewable energy innovation by allowing renewable energy producers to offload excess energy to Bitcoin miners. It offers Bitcoin mining as part of the solution to renewable energy “intermittency,” which is the fact that energy sources like wind and solar aren’t constantly available and predictable. The argument is essentially that Bitcoin can be mined using the leftover energy from wind and solar production when it can’t be used elsewhere, creating extra profits for the renewable energy companies.

Although the memo makes sense in theory, critics claim that Dorsey and Cathie Wood had a vested interest in publishing it. Square bought $170 million worth of Bitcoin in February, while Wood’s company holds more than $345 million in Grayscale Bitcoin Trust, the first publicly traded security investing solely in Bitcoin.

In March, Elon Musk had announced that Tesla would be accepting payments in Bitcoin. Last week, he backtracked and made the decision that Tesla would no longer be accepting payments in Bitcoin, tweeting “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.”

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It has become clear that the energy usage of cryptocurrencies using a Proof-of-Work model is bad for the environment. It is important for investors and cryptocurrency holders to be aware of which mining-method specific cryptocurrencies use. The transition from Proof-of-Work towards Proof-of-Stake seems inevitable as this issue is more widely recognized and understood by the masses. The energy consumption by Proof-of-Work cryptocurrencies will only increase as more people start to use cryptocurrency. However, we cannot classify all cryptocurrencies as bad for the environment because many of them are not.