Impact of Cryptocurrencies on the Environment

08 Feb, 2023

Rapid technological advancement has contributed to the emergence of digital currencies booming the digital economy. Digital currencies, however, are produced using a large amount of energy which in turn affects our environment. It is evident from the fact that the cost of issuing digital currencies is outweighing the benefits and thus, is contributing to the degradation of the environment. As claimed by its supporters, these digital currencies are not cost-efficient at all due to their externalities, mainly negative, produced during such digital transactions. This, in turn, is pushing our goal of the Paris Agreement to limit the rise in global temperature to well below 2°C and to decarbonize the market by 2070. In this article, I’ll discuss the impacts of cryptocurrencies on the environment. I’ll also explain how this digital economy is becoming a significant contributor to greenhouse gas emissions (GHGs) and why there is an urgent need for a policy shift and the adoption of other sustainable alternatives.

Introduction

Digital currency is an intangible currency which can be exchanged virtually using the internet. It is a method of a transaction between two parties without the intervention of a third party i.e., the government and banks. Thus, digital currencies are neither verified by the government nor regulated by the banks. For instance, if X and his friends agree to keep a ledger to record their daily transactions. To ensure the validity of each transaction, they decide to use digital signatures, a type of cryptography which is quite difficult to forge as they are encrypted and can be decoded only through private keys. The process of the generation of digital currencies is very similar to the verification of digital signatures. Cryptos need to be decoded to generate digital currencies, and therefore these digital currencies are also referred to as ‘cryptocurrencies’. These cryptos are nothing but complex mathematical problems which can only be solved with the help of special computers known as ‘General Processing Units’ (GPUs). Currently, there are 20,000 cryptocurrencies out of which Bitcoins and Ethereum are the most popular ones.

After each digital transaction, a new Bitcoin is generated using GPUs. This process of generating new digital currencies is called ‘Crypto Mining’. Similar to gold mines, Bitcoins are also limited. There are only 21 million Bitcoins that can be mined out of which 90% have already been mined and only 10% is left to mine.¹ To prevent the miners from rapid mining, the difficulty level is maintained after each transaction. It takes about 10 minutes on average to validate each transaction by adjusting the difficulty of the problems. Rapid mining of the remaining 10% of Bitcoins is ultimately pushing the limits of our planet Earth.

Since Bitcoins are limited and to continue the flow of Bitcoin, the quantity of Bitcoins is reduced to halve after every four years. Scarcity in supply increases the value of Bitcoins, making the process rather expensive and inefficient for miners. As mentioned earlier, there are at least 20,000 other cryptocurrencies apart from Bitcoin which are also continuously mining, and eventually increasing the consumption of electricity globally.

Environmental Effects of Cryptocurrencies

As the difficulty level of the problems rises after every transaction, the power of existing GPUs decreases and thus it requires a considerable amount of energy to accelerate the mining process. Continuous increase in electricity demand for mining makes it impossible for miners to afford electricity from cleaner or renewable resources. And thus they are forced to buy cheap electricity from dirty power plants. The use of cheap electricity can lead to GHG emissions, along with an increase in noise pollution. According to Digiconomist, the current annual carbon footprint of Bitcoin is 43.85 Mt CO2 which is equivalent to that of Hong Kong. The total annual consumption of electricity for issuing Bitcoin is 78.61 TWh which is equivalent to the power consumption of Chile.²

In addition to this, a significant amount of electronic waste is also generated because of GPUs which are essentially hardware used for a specialized and single purpose that becomes obsolete approximately after every 1.5 years. As per Digiconomist data, the annual e-waste generated from hardware is 43.87 kt which is comparable to the e-waste of small IT equipment in the Netherlands.

These figures for carbon emission and power consumption are quite intimidating. Also, it portrays one thing that amidst such deteriorating conditions of our environment, increasing demand for electricity is a serious impediment to our progress in achieving goals set out in the Paris Agreement. Recently, a report by ‘Nature Climate Change’ has made a threatening claim that if the current rate of Bitcoin mining continues, then emissions from it alone could push global warming above 2°C within less than three decades.³

The report also suggests that the carbon footprint of Bitcoin is quite large for such a small share of global cashless transactions which was only ~0.033% in 2017. Cryptocurrencies are more of a speculation rather than ideal virtual currencies that can be used for real transactions in future. Except for a few mercantile transactions, Bitcoins are mostly useless and cannot be used to purchase any real goods and services. As per Digiconomist data, a single Bitcoin transaction is expensive and highly inefficient as the annual carbon footprint of a single Bitcoin transaction is 433.97 kgCO2 which is equivalent to the carbon footprint of 961,832 VISA transactions or 72,329 hours of watching Youtube. This shows that the cost of issuing Bitcoin outweighs its benefits and is not cost-effective as claimed by its supporters.

Alternatives-

1. Policies

It is up to regulators and policymakers to take steps to reduce the effects of crypto mining on our environment. Since the price of electricity varies across nations, the miners tend to set up their mines preferably in areas where the electricity is cheap. Accordingly, a new report by Cambridge Centre for Alternative Finance claims that despite Beijing’s ban on mining practices in July 2021, China is still the second-largest mining hub in the world. Thus, the energy policies of countries where crypto mines are located highly influence the environmental impacts of crypto-mining, which would be instrumental in reducing the annual carbon footprint of Bitcoins.

2. Proof of Stake

Most of the crypto miners have adopted the “Proof of Work” (POW) mechanism which includes complex problem-solving by means of GPUs. These GPUs are highly energy intensive and so, every time whenever the price of Bitcoin rises so does the competition among the miners. Consequently, it increases electricity consumption over time.

Instead of the POW mechanism, “Proof of Stake” (POS) as an alternate mechanism should be adopted. POS uses a consensus mechanism where it is the participants who validate a transaction. For example, Cardano, Solana, Polkadot, etc. It requires less energy than POW which can help in reducing power consumption and thus reducing the impacts on the environment.⁴

Conclusion

Though it is considered a boom in the digital finance world, if the current energy consumption continues it would reverse our progress towards achieving climate-related goals. In addition to this, it would also hinder the smooth transition towards renewable energy resources. Thus, regardless of it being a potential future mode of transaction, the environmental costs of such currency on the environment should not be overlooked.

References-