Recently, the CEO of Tesla, Elon Musk, has announced that he would stop allowing clients to purchase vehicles with Bitcoins, one of the most well-known cryptocurrencies currently in service. His decision is based on the fact that the digital currency has been criticised for its negative environmental footprint and the growing use of fossil fuel. Elon Musk concluded his Tweet saying that he would revert to use it for transactions as soon as mining (the process that creates Bitcoins) becomes more sustainable.
Elon Musk's resolution brought to the forefront concerns on cryptocurrencies that were first raised back in 2009 when Hal Finney, one of the early proponents of Bitcoin warned about future CO2 emissions originating from its extensive use. Nevertheless, since then, this matter was never truly analysed.
As the popularity of digitalised money grew, cryptocurrencies and Bitcoin have been in the spotlight for their disastrous ecological side effects. Indeed, the manufacturing of new chips is coordinated by advanced computers that solve complex mathematical algorithms to create new coins. Bitcoin's success led to an unavoidable boost in energy usage, the main source that supplies the greatly energy-demanding process that allows servers to solve increasingly complicated problems. Since its inception, numeric cash has been acclaimed as the future of finance. However, in today's world characterised by an increasing emphasis and awareness of the environmental challenges, can it represent in the long run a viable and sustainable technological advancement?
To trace back the root of ecological concerns surrounding cryptocurrencies and, in particular Bitcoin, it is necessary to understand how the coins are created. These are generated through what is called a mining process: competing computers cracking very intricated math problems and being given Bitcoins as a reward. At its origins, in 2009, this financial device was still very niche and therefore, an average computer could decipher the codes. However, Bitcoin's inventor established that only 21 million chips could be generated and that the fewer Bitcoins were left, the harder to solve would the algorithms become. This restriction, combined with the surge in 2017 in its price and popularity, compelled miners to employ cutting edge technological equipment that could undergo the extreme processing power needed to forge new coins. As a result, the energy demand required by these servers to operate grew more and more.
When commenting on Bitcoin's green impact, Charles Hoskinson, the CEO of IOHK - a prominent technology firm - said that "energy inefficiency is built into Bitcoin's DNA". He also added that "Bitcoin's carbon footprint will get exponentially worse because the more its price rises, the more competition there is for the currency and thus the more energy it consumes".
The Cambridge Bitcoin Electricity Consumption Index has demonstrated that if the cryptocurrency was a nation, it would rank as the 27th highest energy consumption country in the world, with an annual electricity expenditure above Sweden or Ukraine. Cambridge University's analysis has also discovered that Bitcoin's annual energy spending is comparable to the amount of electricity needed to power all tea kettles in the United Kingdom for 30 years.
The disastrous impact on the environment is also reinforced by the fact that in the race to find the energy to support their processing machines, miners are turning to countries where this resource is cheap. Even if some advocates of Bitcoin claim that the power used is increasingly drawn from renewable sources, no institution is tracking this matter and therefore, Bitcoin's origins of supply are still unclear. Yet, recent studies have indicated that the majority of the mining process happens in China, a country which mainly relies on coal for its energy. Indeed, here is where around 70% of Bitcoins are generated, thus hindering the reduction of carbon emissions.
However, numerous supporters of cryptocurrencies affirm that the ecological damage Bitcoin bears is an unavoidable trade-off that comes with the benefits of this financial innovation. For example, the venture capitalist Tyler Winklevoss has stated that "Sometimes a technology is so revolutionary and important for humanity that society accepts the tradeoffs”. In the same way, Ria Bhutoria, Research Director at Fidelity Digital Assets has asserted that "Bitcoin would not be able to fulfil its role as a secure, global value transfer and storage system without being costly to maintain".
On the other end of the spectrum, other cryptocurrencies other than Bitcoins might be viable and more eco-friendly options for the future. Indeed, Ethereum and Litecoin, other influential digital chips, are attempting to address the environmental concerns related to their energy-intensive transactions systems. For example, in 2019 Ethereum has announced the bold goal of decreasing in three phases its electricity demand by 99%, completing the transformation in 2022.
In February 2021, after an increase in its price, Bitcoin was ranked as the "ninth most valuable asset in the world", ahead of Facebook and Tesla. However, it has been argued that this status is inaccurate and does not represent its real value. One of the reasons for this claim is that its price is not backed by nations and governments, like for normal currencies. Instead, its financial value is based purely on faith and therefore, is exposed to severe variations. This could represent a double-edged sword for the environmental cause. A sharp fall in its value might force Bitcoin and other cryptocurrencies to turn to greener options to satisfy concerns. This happened after Elon Musk's declaration and a decrease in Bitcoins’ price. Numerous digital coins seem to have decided to turn to the proof of stake, an alternative transactions process that would greatly shrink the servers' electricity expenditure. However, if Bitcoin's popularity rose back to its previous levels, miners will be less compelled to shift to more environment-friendly alternatives. Indeed, as Susanne Köhler, a researcher at Aalborg University, recently commented, the current process is extremely profitable and would allow miners to reinvest their profits in more advanced computers thus, maintaining the "vicious cycle". Therefore, the future of Bitcoin and cryptocurrencies is at a crossroad and has yet to be determined.
Written by Cinzia Saro
Cinzia Saro is a columnist at DecipherGrey.