With all sorts of investments ranging from stocks and exchange-traded funds (ETFs) to real estate becoming more accessible through services like Robinhood, it has never been easier for the average person to invest. And as I get older, I’m having tonnes of conversations with friends and family about personal finance and investment with increasing frequency. Occasionally the discussions lead to cryptocurrencies like Bitcoin, and I get questions on whether I have invested in them. I have personally never invested in Bitcoin (or any other cryptocurrency for that matter) for a myriad of reasons, but the main rationale behind my decision, which very few people are aware of, acknowledge or talk about, is its devastating environmental impact.
What is the problem?
Despite varying views on the actual value of Bitcoin to society, the truth of the matter is that the increase in popularity of the cryptocurrency has been disastrous for the planet. Bitcoin is extremely energy and resource-intensive because it uses what is known as a “proof of work” algorithm to verify transactions. Bitcoin miners around the world compete to solve complex mathematical problems using specialised mining devices and rigs with huge amounts of processing power in order to validate transactions made by Bitcoin users and are then rewarded with Bitcoin if they are successful. The mathematical problems become much more difficult to solve as more bitcoins are mined, therefore leading to increasing amounts of energy needed.
Oftentimes, these mining devices use enormous amounts of energy and are located at places with access to cheap electricity like remote areas in China and Mongolia, with a majority being powered by electricity generated with non-renewable sources like coal plants. At its current rate, the total amount of energy used annually to power Bitcoin’s underlying blockchain is around 150TWh (central estimate), more than the annual consumption of many countries. Besides its massive carbon footprint and energy usage, Bitcoin also has a huge electronic waste problem. The mining devices and their components become obsolete fast, often in under two years, and can’t really be repurposed for anything else.
How bad is it?
Here are some shocking statistics about Bitcoin’s environmental impact:
Graphic by Sarah Harman | U.S. Department of Energy
Suffice to say, Bitcoin in its current form is extremely destructive to the planet and exacerbates climate change, and the environmental impact only gets worse as its value goes up. This issue, however, is not limited to Bitcoin but also to other cryptocurrencies that use “proof of work” algorithms including Ethereum and Litecoin.
To address concerns about the environment, some cryptocurrencies are transitioning from a “proof of work” to a “proof of stake” model (I’ll publish a separate post in the future explaining how both these algorithms work) which significantly reduces the energy consumption of the underlying blockchain. Ethereum, for example, is planning to phase into a “proof of stake” model in early 2022, which some estimate will reduce its energy usage by almost 99%. There are also many other alternative coins that already use “proof of stake”. But as of now, Bitcoin and many cryptocurrencies employ a “proof of work” algorithm, and they are contributing heavily to climate change.
Then there’s the ever-increasing problem of e-waste due to Bitcoin mining. As I mentioned in my previous article, e-waste is often very toxic, releasing heavy metals and other dangerous chemicals into the soil at landfills.
Proponents of Bitcoin, however, argue that the network is increasingly utilising renewable energy and may even incentivise the adoption of renewables. Even if this is true, the renewable energy that Bitcoin miners consume could alternatively be used for other purposes like powering homes, factories and electric vehicles that would otherwise be using non-renewable energy. Most places globally do not have excess renewable energy, and there will be an enormous opportunity cost to this. Bitcoin evangelists also argue that the traditional banking and finance industry uses considerably more energy compared to the Bitcoin network. Again, whilst this is true, the former has significantly more users (by a huge margin) than the latter.
What can we do?
For starters, we could research more about Bitcoin’s environmental problem and spread awareness on the subject (you could also share this article with your friends and family . But more importantly, we should weigh the pros and cons, take the environmental factor into account and make an informed decision before investing in Bitcoin (or other cryptocurrencies), especially if it does not resonate with our values. Remember, even though we can’t see them directly, our investments often have real-world impacts.
*Cover photo credit to Dmitry Demidko on Unsplash
Arvinth Gunasegaran | MSc International Business, Nottingham University (UK)