The Dirty Secret of Cryptocurrency: Energy Consumption

In February 2021, Texas suffered a severe energy crisis after severe winter storms caused the state’s faltering power grid to fail. The above transition shows NASA satellite imagery of the Houston night lights before (February 7) and after (February 16) the power outage caused by storms. About four million customers across the state were without power during the crisis. credit: state of the planet

While skeptics might describe cryptocurrency as “fake money,” “worse than tulips,” or outright fraud, it’s the real deal. The market capitalization of nearly 19,000 cryptocurrencies currently in circulation is about $1.75 trillion, roughly the same as the GDP of Italy, the eighth largest economy in the world. Although you may not be able to buy a loaf with Bitcoin at the corner store, many investors invest a lot of fiat money in cryptocurrency.

But cryptocurrencies have a dirty little secret that is relevant to the real world: they use a lot of energy. How much energy? Bitcoin, the world’s largest cryptocurrency, currently consumes about 150 TWh of electricity annually, more than the entire country of Argentina, which has a population of 45 million. The production of this energy results in approximately 65 megatons of carbon dioxide in the atmosphere each year, compared to the emissions of Greece, making cryptocurrencies an important contributor to global air pollution and climate change.

Cryptocurrencies’ thirst for energy is growing as mining companies rush to build larger structures to take advantage of the gold rush of the 21st century.

“Bitcoin mining is in an arms race between time, the size of the miners and the efficiency of the machines they use,” said Joshua D. Rhodes of the Center for Global Energy Policy. “When it comes to Bitcoin’s energy consumption, it is currently a kind of ‘wild’ market.” Texas network operator ERCOT estimates that crypto miners could increase energy demand by up to 6 gigawatts by mid-2023, roughly equivalent to adding Houston other to the network.

As Bitcoin mining comes under increasing criticism for its increased use of energy, the phenomenon may be approaching a tipping point where cryptocurrencies will need to turn green to prove that it is a real tipping point.

The line goes up

Bitcoin enthusiasts, or miners, earn coins by using computers to solve puzzles in the decentralized database that forms its foundation, the blockchain. In the early days of bitcoin, about a decade ago, miners could use home computers to mint new coins that were worth a few dollars, at least on display. As the market has grown over time, the puzzles that miners have to solve to earn new coins are becoming increasingly complex, requiring more computing power, and therefore energy.

Today, bitcoin mining is a very competitive business, with sprawling, air-conditioned facilities housing tens of thousands of high-tech computers running 24 hours a day. Despite the high volatility, one bitcoin has soared in value this year. It hovered around 40 $0.000.

Value of one bitcoin in US dollars (area) and trading volume (bottom bars), January 1, 2016 – May 2, 2022. Credit: Yahoo! finance

Like any developed industry, cryptocurrency miners have sought to simplify their operations and increase profits as they grow. Finding cheap and abundant energy is an essential part of this strategy and a deciding factor in choosing mining operations to open a shop. Until recently, about 75% of all bitcoin mining took place in China, which gave access to low-cost electricity and hardware. But, citing concerns about fraud, economic instability and meeting its climate goals, the Chinese government suddenly pulled the plug on decentralized digital currencies in 2021. Mining companies scrambled to find suitable venues with more lenient policies. Today, the lion’s share of bitcoin mining is obtained in the United States, where there is now 35% of the bitcoin hash rate, which is the total computing power used to mine and process transactions.

Unfortunately, China’s crackdown on cryptocurrency appears to have made cryptocurrency mining even dirtier. Some of China’s mining operations have reduced carbon emissions by harnessing abundant and affordable hydropower, a renewable energy source, during the rainy season. But after China’s crackdown, the share of natural gas used in bitcoin’s electricity mix doubled to 31%. Kazakhstan, now the world’s second largest bitcoin hub, gets about 50% of its energy from high-carbon coal-fired power plants.

Perhaps most disturbingly, some companies in the United States are now bringing retired power stations online to cash in on cryptocurrency. Greenidge Generation, a Bitcoin mining facility powered by natural gas in the scenic Finger Lakes region of New York, is a controversial example of this trend. Local groups report that the plant is not only polluting the air, but also destroying the Seneca Lake ecosystem by draining up to 135 gallons of warm water per day into New York’s deepest glacial lake. More broadly, there are concerns that the plant could be a canary in the cryptocurrency miners of both New York state and the nation.

Digital dollars and common sense

Like other disruptive new technologies, cryptocurrencies have left governments unprepared and unsure how to regulate the explosive new market. Although Plattsburgh, New York became the first city in the United States to temporarily ban cryptocurrency mining in 2018, there is currently no federal legislation specifically focused on cryptocurrency mining. However, despite opposition from the crypto industry, the New York State Assembly last week passed a bill that would impose a two-year ban on high-density Proof of Work crypto-mining facilities. Energy receives energy behind a meter from the energy of fossil fuels. the plants.

“The moratorium is significant because it will give New York time to assess the environmental risks of expanding the state’s crypto-mining industry, including the industry’s potential impacts on the state’s ability to meet greenhouse gas emissions reduction targets for the Climate Leadership and Community Protection Act,” said Jacob Price-Elkin, and put in place appropriate systems in response.” Elkin, a fellow at the Sabine Center for Climate Change Law, wrote an article on the topic in March.

A similar bill is currently awaiting approval in the Senate. However, the fate of the current Greenedge plant remains unclear.

Greenidge Generation’s air quality permit expired last September, but the New York Department of Environmental Conservation has delayed the renewal decision twice. During this time, Greenidge competed to install thousands of new computers and significantly increase their power generation capacity. Although it prohibits expansion, if approved in its current form, the state moratorium would not apply to existing mining facilities. However, critics of the Greenedge plant, including DEC Commissioner Basil Segos, have pointed out that it goes against New York’s Climate Driving and Historic Society Protection Act, which calls for economic cuts in greenhouse gas emissions. 40% by 2030. It has been estimated that cryptocurrency mining could account for up to 7% of all carbon emissions in New York State by the end of the decade.

The deadline for a decision on Greenedge’s permit has been set for June 30, two days after the statewide primary. Meanwhile, Greenidge’s mining and expansion operations continue.

The Dirty Secret of Cryptocurrency: Energy Consumption

US Bitcoin Hash Percentage Map, March 2022. Credit: Foundry

The Future of Cryptocurrency: Will Gold Turn Green?

Advocates of digital currencies and blockchain point out that they are innovative technologies and that we are just beginning to explore their potential.

“There are some shortcomings in our financial services industry that can be mitigated by using blockchain technologies, allowing us to address important issues such as equity, access and cost,” said RA Farrokhnia, executive director of Columbia’s Advanced Projects and Applied Research in Fintech. . “With the right safeguards, oversight, and responsible innovation applications, we can pair advances in fintech and blockchain with increasingly sophisticated data analytics tools, particularly machine learning and artificial intelligence, to create and deliver robust products and solutions in a more efficient, intelligent and ethical manner in a comprehensive manner.”

However, this promise may not be enough for skeptics, especially when it comes at such a high price. But cryptocurrencies could have another opportunity to prove their value beyond their portfolio: by becoming a leader in the transition to sustainable energy sources.

“Some of my research has shown that if mines are willing to be resilient, they can pair well with renewable energy by quickly adjusting their energy consumption to existing grid conditions,” Rhodes said. However, it is not certain that they will. It is important that cryptocurrency mining supports the development of renewable energy (or other carbon-free energy) because otherwise it will be just another sector that will contribute to the climate crisis.”

Like other industries, the crypto space will face many challenges if it attempts to go green, such as recognizing its environmental impact, incorporating truly sustainable practices (such as the Proof of Stake consensus mechanism) into its operations, and ultimately, avoiding the pursuit of profit at all costs.

If the crypto community is willing to take on these challenges, it can still demonstrate a real transformation by leveraging finance and technology to catalyze the transition to sustainable energy sources. If not, the skeptics may be right: When the bitcoin bubble bursts, it may leave not only investors, but the planet itself holding the stock market.

This story has been republished with permission from Columbia University’s Earth Institute

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