A few weeks ago, we reported on the historic moment when El Salvador, a country shy of just over 6 million people, became the first country to spearhead the adoption of Bitcoin as a court-recognised, legal tender for monetary applications. What came as a massive shock to many, the Internet has since been populated by many different perspectives on the future of Bitcoin, and the holistic acceptance of cryptocurrency as an alternative asset of value and practicality.
Despite a highly progressive move by the Central American nation, Bitcoin has not been acquitted of its many stigmas; one of which being its perceived lack of environmental sustainability, a lingering shadow that continues to weigh down on the asset’s widespread utility.
Today, we dive past the noise around this claim, and take a closer investigation into Bitcoin’s environmental sustainability at current, and evaluate the continual progress being made by Bitcoin in the aspects of sustainability for the decades to come.
Right now, it is without question that Bitcoin’s level of energy consumption is not to be undermined. Bitcoin’s network relies on the validation of its transactions, which uses a high level of computational power by miners across the globe. According to a contributional report on Nasdaq, Bitcoin’s electricity consumption has grown 66 times since 2015, and as of mid-May, the electrical demand for Bitcoin remains at a rough estimate of 121 terawatt-hours, which surpasses even countries such as Argentina, and ranks amongst the top 30 countries in the world by this standard.
However, the composition and allocation of energy is a lot more complex than this, and it’s often quite confusing as to what to listen to and what to believe. So, let’s take the opportunity to break these things down.
Comparing Bitcoin to a country is a difficult metric to draw valuable insight. After all, Bitcoin serves a different purpose and directive to an entire nation. Furthermore, whilst energy consumption is often correlated with fossil fuel production, the term is often only misconstrued as such, since energy consumption is not always equivalent to environmental pollution. Whilst energy consumption has a direct impact on environmental damage, it is more often the case that the energy mix in consumption is statistically more significant in determining the material impact. For Bitcoin, 99% of this energy mix is used in the mining process, otherwise known as the process by which Bitcoin is released into the ecosystem by the verification of transactions. Although, across 59 countries, it was estimated that whilst 76% of surveyed miners stated that they used renewable energy, only 39% of Bitcoin’s total energy consumption includes renewables as a source of power.
This might seem debasing, but compared to countries, this isn’t a terrible result, considering that an economically sound country like Australia still uses coal and natural gas in over 77% of its energy mix.
Of course, again, these comparisons produce the same delusive inferences; comparing Bitcoin, a decentralised payment network, to Australia, a multifaceted country of 26 million people, is not a fair contrast. Perhaps, the most valuable insight from this back-and-forth is that it ultimately comes down to the infrastructure of our energy resource sector being used that needs to be tackled, rather than the infrastructure on top that makes use of the energy resources available. Would Bitcoin display the energy inefficiency it is perceived to have if the resources in abundance were environmentally efficient in the first place? That would perhaps be a question to answer, as the world continues to push for renewable energy and carbon neutrality, across industries and society alike.
This draws to the point that the environment of energy is rapidly changing. Whilst fossil fuels have dominated much of our global energy mix since the 1800s, it is apparent that cleaner, renewable energy is being increasingly used in the energy mix. The related costs of production and distribution for renewables are also falling much lower than the costs associated with fossil fuels.
Why does the energy mix and costs of energy matter to Bitcoin? Well, Bitcoin miners are incentivised to utilise energy that is cheap and scalable for higher Bitcoin hashrates. This certainly seems to be the case: as the graphic above shows, the price of renewables is falling at an exceedingly faster rate than fossil fuels, such as coal and nuclear energy. As the cost base of energy consumption falls for renewables, miners will capture such opportunities to use energy that reduces their expenses to maximise the profits of their efforts on the network.
The map below shows the generalised distribution of bitcoin mining areas around the world. The amount of computing power being used to maintain the Bitcoin network, known as the hashrate, has been predominantly occupied by China by over 65% to date.
Yet, recent reports of mine shutdowns in China have resulted in a decline in the country’s market share of the Bitcoin hashrate. The news had sweeping effects on Bitcoin's price, following a few other downtrends in the past few months.
However, the shift in mining hotspots is actually likely to increase the benefit for miners outside of China, and the abundance of wider spread mining locations, wherever the energy sources are cheap and accessible, such as Europe and the Americas. As such, whilst Bitcoin’s price discounts favourably for new investors, the feasibility of fairer, renewable mining spread across multiple countries becomes all the more probable at the same time, increasing the distribution of the hashrate across various jurisdictions around the world and promoting free market dynamics.
Furthermore, Bitcoin mining is not an infinitely expanding system. As we head towards the year 2140, when the entire Bitcoin supply is expected to be in full distribution across the globe, the reward for mining is expected to fall over the years as well, as Bitcoin’s market cycles, or ‘halvings’, take place. Bitcoin miners will earn less revenue overall, because the rewards for validating transactions on the blockchain gradually dissipate, and miners will only be able to draw mining income from transaction fees. Of course, mining is an expensive task, and we are over a century too early to know how energy resources will change, how mining technology will change, how the Bitcoin protocol will change, and how global policies and sentiments for cryptocurrency will change. There are many possibilities, and it is only a distant yet exciting opportunity to consider these prospects.
So far we’ve discussed Bitcoin in its current disposition, and made some allusion to what the future may hold. But just exactly how could Bitcoin’s energy record track over the next ten, twenty, or fifty years? Will Bitcoin alter its trajectory, or will its model continue straight ahead?
There have been many alternatives proposed to what Bitcoin happens to be right now. These are just a few:
Bitcoin could transfer from Proof-of-Work (PoW), the consensus algorithm where miners compete against each other to verify transactions by solving computational problems, to Proof-of-Stake (PoS), the consensus algorithm where network validators are prioritised based on the proportion of their Bitcoin holdings stored in the network as collateral. PoS is often unconditionally more energy-efficient than PoW, since the precedence of reward goes to those who give the most collateral to the network and removes the high-power computing used in PoW. Of course, the tradeoff is that PoS is far less secure and more complex than its alternative. But, Ethereum, for instance, is also transferring to PoS, which is estimated to reduce its energy consumption by 99.5%.
Government subsidies that offset carbon emissions, known as carbon credits, could also be utilised by the Bitcoin network to gain greater profit than usual for using cleaner energy as a substitute for carbon-intensive options. It could also be possible for consumers of Bitcoin to use credits to offset transaction fees when using the network. Carbon credits are also investable, which can introduce an alternative kind of utility for Bitcoin users from an environmental policy perspective.
At the end of the day, it is renewable energy that will be the deciding factor in Bitcoin’s environmental sustainability. If Iceland as a country is able to utilise almost 100% of its energy supply from renewables, Bitcoin and the rest of the world could also follow suit. As aforementioned, it is perhaps not Bitcoin that is the problem, but the state of what the energy sector is composed of, and how it can be better utilised across the globe. And, adding insult to injury, the majority of nations in the Paris agreement, an international treaty on reducing climate change, probably won’t even meet their climate change goals by 2030. So, perhaps it really is the system that requires the most attention, rather than the groundwork that has been built on top of it, that is, the Bitcoin ecosystem.
Bitcoin can and could in fact become a key part of clean energy on a global scale. Whilst this may seem counterintuitive at the moment because of public concerns and misconceptions, there remains ongoing initiatives from the Bitcoin Clean Energy initiative, Bitcoin Mining Council, and the United Nations that are helping to catalyse the progression of Bitcoin as a sustainable payment network and store of value, offering monetary and technological utility to the laggard financial system we see today. Whilst the future seems unclear at current, a push for advancements in mining technology, renewable energy policies, and regulatory developments in regards to cryptocurrency, will be the greatest possible factors for Bitcoin to achieve widespread sustainability. The road is long and arduous, but with the holistic efforts of investors, developers, and institutions, Bitcoin and the environment do not and should not have to remain public enemies any longer.