It’s been three weeks since Tesla CEO Elon Musk tweeted that the electric car company discontinued Bitcoin as a payment option, citing concerns about the cryptocurrency’s association with higher fossil fuel consumption.
Since May 12, Bitcoin BTCUSD, + 4.41%, has plummeted by about a third, in part due to criticism of its carbon footprint.
But the problem is not that simple.
Today I am joined by Alexander Benfield, a cryptocurrency analyst at Weiss Ratings. Instead of focusing on general market dynamics, we will talk about Bitcoin and issues related to its energy consumption during the mining process.
The cryptocurrency network is based on computers that solve puzzles that consume electricity. According to the University of Cambridge, the annual electricity consumption in Bitcoin mining is around 130 terawatt hours. For comparison: the USA consumes almost 4,000 terawatt hours of electricity annually.
Market observation: The claim that Bitcoin is an energy hog has been around for some time. How much justification does such a claim have?
Benfield: That is a question with a complex answer. Yes, Bitcoin uses a lot of energy, but that doesn’t necessarily result in carbon emissions. Much of Bitcoin mining uses renewable energy; Depending on the source, this number is between 39% and 73%, which is well above the share of renewable energies in the US power grid. Even by the low estimates, Bitcoin is far more energy conscious than the average industry. In addition, a significant portion of Bitcoin mining is actually consuming excess energy that would otherwise be wasted in areas where it cannot be exported to nearby urban infrastructure. For example, bitcoin miners in rural China use hydropower, which would otherwise be wasted due to low local energy needs and the inability to transport that excess energy to an urban power grid.
Market observation: Some analysts say that Bitcoin is actually “greener” than many people think. What do you mean by that?
Benfield: Nic Carter has done amazing research on the subject and is constantly trying to prove it on television. (Carter is a general partner at Castle Island Ventures, a Cambridge, Massachusetts-based venture firm.) Many critics, however, don’t listen. Cathie Wood recently visited Bloomberg to discuss possible ways to add bitcoin mining to renewable energy providers’ power grids to take advantage of the intermittent times when their excess energy is currently being wasted. (Wood is CEO of active ETF manager ARK Invest.) So maybe Bitcoin can actually help to use a lot more wasted energy than previously thought.
Market observation: So far we have found that Bitcoin is a bit energy hungry. What is all of this energy used for?
Benfield: Bitcoin’s energy consumption makes Bitcoin more secure. The cost of attacking Bitcoin increases as the computing power and energy consumption of those who dismantle or secure the network increase.
Market observation: We hear a lot about the advent of cryptocurrencies, which use less energy than Bitcoin. What can you tell us about them?
Benfield: Many of the “green” cryptos market their blockchain as energy efficient because that’s better than saying they have underdeveloped networks that no one is using, validating, or breaking down. However, proof-of-stake cryptocurrencies tend to be much more energy efficient and new projects will likely turn their attention to the proof-of-stake because of the energy benefits.
Market observation: Will Bitcoin evolve and grow to surpass its energy hunger? What’s next for the world’s most popular cryptocurrency?
Benfield: Much of Bitcoin’s energy consumption has been used to mine new coins rather than actually processing transactions. After all coins have been mined, energy consumption will likely decrease as validating transactions uses far less energy than coin mining. There is also the possibility that scaling solutions and upgrades that have been in the works for years could help reduce energy consumption by offloading some of the transaction processing to Layer 2s or sidechains. These sidechains or Layer 2s would then check the Bitcoin blockchain, but similar to the Blitz solution, individual transactions would be processed outside the main chain and the summaries of these transactions would be stored on the main Bitcoin blockchain during these checkpoints.
Market observation: After all, is this energy problem big enough to put Bitcoin and cryptocurrencies at risk as a store of value?
Benfield: No, ultimately the question of Bitcoin’s energy consumption boils down to whether it is worth consuming. Bitcoin users will ultimately need to demonstrate Bitcoin’s societal value to the world in order to justify its energy footprint.
There you have it. After this conversation with Alex, reviewing Nic Carter’s research (the link is above, I strongly encourage you to read), and other papers on the subject, it appears that many of the issues related to the carbon footprint of Bitcoin was exaggerated or simply misrepresented.
A lot of big-picture thinking is required to determine Bitcoin’s impact on the environment. It is easy to overlook the forest for the trees, and even easier to rely on information that has now been exposed simply because it encourages cognitive bias.
The way I see it, cryptocurrencies are not disappearing, and neither is Bitcoin either. Current market action doesn’t look like anything out of the ordinary – even more volatile crypto actions like we’ve seen in the past. This slump is likely just a break.
What do you think? Do you support the use of Bitcoin or do you prefer to invest in one of the “green” cryptocurrencies? Which one?
Let me know in the comments section below.