• Lucas Yanez-Renshaw

CMI Explains: Why is Crypto Bad for the Environment?

Updated: Mar 22, 2021

Imagine you are completely unfamiliar with Bitcoin mining and had to quantify its environmental impact. More precisely, this figure as a percentage of world energy consumption. I imagine you would hazard a guess in the conservative region of a thousandth anywhere up to a hundredth of a percent of the world’s energy usage. You might wonder where these apparently arbitrary estimates have come from. I put this question to a handful of other students with little or no familiarity with cryptocurrencies and this was the estimate range. And not unreasonably.

To understand why these estimates fall short, it is imperative to examine the ubiquitous cognitive bias associated with these types of heuristic simplifications, omnipresent with this kind of estimation problem. This skewed estimation is beautifully outlined in Thinking Fast and Slow. The breakdown by industry is pathological in the same way as the results of the Holmgren et al. 2019 paper, which deals with the cognitive bias in people’s judgements of the benefits of CO2 emission cuts. People tend to underestimate the contribution from industries like steel production in energy consumption and overplay the contribution from the transport industry with which they have daily exposure. This alone is however insufficient to explain the chasmic difference.

I’ve delayed quoting the energy consumption thus far as I want to give the reader an opportunity to estimate for themselves the environmental cost. I won’t delay any longer; Bitcoin uses 1% of global energy consumption, more electricity annually than the whole of Argentina. So finds recent research from the University of Cambridge. An enormous 121.36 TWh a year, according to a report compiled in 2018 by the US Senate Committee on Energy and Natural Resources. For comparison, a ‘watthour’ is roughly the energy associated with boiling a kettle. In energy terms, back of the envelope estimates reveal the almost unbelievable scale of the problem. The mining industry is equivalent to making of the order of 1014 cups of tea per second for a year, setting off 100 million tons of TNT or running a light bulb for approaching the age of the Universe.

This is an entirely predictable outcome of the Bitcoin mining process works. The software that mines Bitcoin fixes the time it takes for all the computers on the network to solve the puzzle in a non-negotiable 10 minutes. This extrinsic scaling of the computing time with computing power has produced an exponential growth in the cryptocurrencies’ energy consumption. The international breakdown is also revealing; China holds a substantial majority stake in Bitcoin and Ethereum mining due to the cheap electricity costs. If all of its miners were taken offline, energy consumption would be reduced by 66%. This simplistic analysis touches only the surface by virtue of how it translates energy usage into environmental impact. The quality of the energy generated in Southwest China, where the majority of the Chinese mining takes place, is very poor and predominantly coal-fired generated.

There is good news. 85% of the revenue from Bitcoin derives from the issuance of new Bitcoins and the issuance process is just over 85% done with the final 21 million limit approaching at the end of this decade. Whilst we have been seeing an exponential increase in recent years in the energy consumption, it is overwhelmingly likely that – unless Bitcoin is unseated as the main crypto player – the issuance component of miner structural decay will, with time, translate into a decay in energy usage. The only way that the expenditure could theoretically increase into the future is a real-terms doubling every four years until 2140, which is, of course, hugely unlikely.

The growth of the renewable energy industry is unlikely to be fast enough to help with the problem of climate change as a whole and Cryptocurrency mining doesn’t seem to be making the task any easier. Some researchers are suggesting a direct mining tax, this smacks of a lack of understanding of the international nature of mining and could actually act to exacerbate the problem. Encouraging countries like Russia and China to take advantage of the shortfall in the Western mining capacity where this would be implemented. Critics point to the ease with which the Bitcoin algorithm could be changed but the consistency of approach in the implementation of Bitcoin is what has proved its greatest strength. The problem is going to get worse before it gets better, but it definitely will get better.