We often hear about surges in the price of bitcoin. There is another movement that crypto advocates are less enthusiastic to talk about - the surge in power needed to drive the currency. The drain on electricity is of such a magnitude that many critics see currencies like bitcoin as major contributors to the global climate crisis.
Analysis by Cambridge University estimates that Bitcoin's annual electricity consumption is more than The Netherlands, United Arab Emirates or Argentina.
Bill Gates is among the sceptics. On a recent Clubhouse interview with CNBC’s Andrew Ross Sorkin, Gates declared, “Bitcoin uses more electricity per transaction than any other method known to mankind.”
With dry understatement, Gates added:"It's not a great climate thing.”
My last blog centred on the impact of Tesla’s purchase of $1.5bn worth of bitcoin. Tesla is seen as flag-bearer for green technology, and most commentators noted the irony.
Is it an act of hypocrisy on the part of Elon Musk? Not necessarily. Tesla’s corporate mission statement promises “To accelerate the world’s transition to sustainable energy.”
It could be argued that bitcoin’s insatiable demand for electricity will advance innovation in sustainable energy.
So is bitcoin a planet wrecker or a catalyst for positive change?
New bitcoins are created by a process called ‘mining’. This is where computers are linked up to the cryptocurrency network, and then set the task of solving computational puzzles. The verified process ensures the bitcoin network is trustworthy and secure. In exchange, miners can receive small amounts of Bitcoin, in a manner often compared to a lottery.
The complexity of the ‘puzzles’ mean the computers need huge processing capacity, often set up as vast data centres. The demand for electricity is enormous.
An American utility company estimated the cost of electricity needed to mine one bitcoin. It depended largely on how much electricity costs - and in America there are startling variations between states. Louisiana came in as the cheapest state to mine a coin at $3,224, compared to a whopping $9,483 in Hawaii.
Even in the cheapest state, at over £3k/coin, it represents substantial demand for power. It is, of course, purely an illustrative point, as mining tends to be focussed in countries with far cheaper electricity.
Tesla’s significant investment in bitcoin has been seen as a catalyst for acceptance of the currency, even for more risk-averse investors. Perhaps the affirmation by Tesla and other big players will pave the way for consideration of bitcoin by Group Treasurers.
But the corporate sector is not solely driven by risk management and return on investment. There are other factors at play. Multinationals care about their image and reputation. They invest heavily in company culture, they endeavour to tackle race and gender bias, and they aim to be carbon neutral. The latter makes bitcoin problematic.
The CIO of Société Générale's Kleinwort Hambros bank, Fahad Kamal, believes that the energy inefficiency makes cryptocurrency unattractive to institutional investors, highlighting the staggering volume of electricity used.
He said, “We are very alarmed, as I'm sure as others are, by the environmental aspects of bitcoin.”
Crypto blogger David Gerard, author of Attack of the 50 Foot Blockchain, spells out the problem: “Bitcoin is literally anti-efficient. So more efficient mining hardware won't help - it'll just be competing against other efficient mining hardware.
“This means that Bitcoin's energy use, and hence its CO2 production, only spirals outwards. It’s very bad that all this energy is being literally wasted in a lottery.
"Tesla got $1.5bn in environmental subsidies in 2020, funded by the taxpayer. It turned around and spent $1.5bn on Bitcoin, which is mostly mined with electricity from coal. Their subsidy needs to be examined."
The problem may get even worse. As the price of bitcoin soars, the incentive to mine increases. The more miners competing, the more difficult it is to earn bitcoins, and the higher the energy demand becomes.
In 2017, climate reporter Emily Atkin wrote, “We have only 32 years left for carbon emissions to peak and then rapidly decrease if our planet is to remain liveable. We don’t have time or resources to waste on bitcoin.”
And Fahad Kamal doesn’t pull any punches: “A huge consumption of electricity [is] used to mine it. That electricity is produced in very dirty ways. And for us, that is a big factor. The fact that bitcoin is dirty, relatively speaking, is a pretty big issue."
No-one disputes that bitcoin consumes vast amounts of electricity. The interesting question is how that energy is generated.
The extent to which bitcoin currently uses green energy is disputed. One Green Planet reports: “In 2019, the Cambridge Center for Alternative Finance found that renewable energy fuels 76% of bitcoin mining, [but this] refers to the share of those who have used renewable energy at any point. In fact, only about 39% of total energy consumption used in Bitcoin mining comes from renewables.”
Even so, bitcoin has its defenders, pointing out that gold mining is hardly environmentally friendly, and traditional currencies also use vast resources.
The anonymous founder of Pylon Finance argued that, “Companies often rely on miners to utilise unused electricity – especially during the pandemic. Hydro companies in Washington and Canada, for example, practically give away electricity due to excess production and low utilisation.
Bitcoin champion Michael Saylor has made a similar point: "Bitcoin runs on stranded energy at the edge of the grid and acts as a global battery for otherwise idle generation facilities, it recycles wasted energy, mitigates capital destruction, & provides a mechanism to commercialise clean, renewable energy wherever we may find it.”
Some of bitcoin’s most outspoken critics are open to reassess their view if bitcoin greens its operation. Kamal says: "You can imagine that bitcoin will get environmentally friendly too and is only mined using solar power, but we're not there yet.”
Bill Gates also says he is happy to accept bitcoin's credentials if green energy is used and it is not "crowding out other users.” This is an important caveat. Cryptocurrency mining has become a lucrative revenue stream for green energy producers as an alternative to mainstream power grids. If mining becomes greener, the downside is there may be less renewable energy for the rest of us.
The hope is that bitcoin and other currencies will be embraced by forward-thinking investors who take environmental concerns seriously. Twitter founder Jack Dorsey, who uses bitcoin through his company, Square, has pledged $10 million to make bitcoin mining cleaner.
If others follow suit, there could be significant investment in green technologies. This has to happen.
If bitcoin wishes to become accepted by treasury departments, the embracing of sustainable energy is not just desirable - it is essential.
Guy Middleton is a Treasury Associate Director at Harvey John.
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