It’s been three weeks since Tesla CEO Elon Musk tweeted that the electric-car company had dropped bitcoin as a payment option, citing concerns over the cryptocurrency’s link to greater consumption of fossil fuels.
Since May 12, bitcoin
has plunged by about a third, dragged down, in part, by criticism over its carbon footprint.
But the issue is not so simple.
Today I’m joined by Alexander Benfield, a cryptocurrency analyst at Weiss Ratings. Instead of focusing on overall market dynamics, we’ll talk about bitcoin and issues surrounding its energy consumption during the mining process.
The cryptocurrency’s network relies on computers solving puzzles, which uses electricity. Annual power consumption of bitcoin mining is about 130 terawatt-hours, according to the University of Cambridge. To put that in perspective, the U.S. uses almost 4,000 terawatt-hours of electricity a year.
MarketWatch: A claim that bitcoin is an energy hog has been around for a while. How much merit is there to such a claim?
Benfield: That is a question with a multi-faceted answer. Yes, bitcoin does consume a lot of energy, but that does not necessarily translate into carbon emissions. Much of bitcoin mining uses renewable energy; depending on the source, that number ranges between 39%-73%, which is far higher than the percentage of renewable energy in the U.S. power grid. So even going by the low estimates, bitcoin is far more energy-conscious than the average industry. Additionally, a considerable amount of bitcoin mining actually uses excess energy that would otherwise be wasted in areas where it can’t be exported to a nearby city infrastructure. For example, bitcoin miners in rural China use hydro-electric energy that would otherwise be wasted due to low local energy demand and the inability to transport that excess energy to an urban power grid.
MarketWatch: Some analysts say bitcoin is actually “greener” than many people think. What do they mean by that?
Benfield: Nic Carter has done some amazing research into this topic and is constantly trying to prove this point on television. (Carter is a general partner at Castle Island Ventures, a Cambridge, Mass.-based venture firm.) However, many critics don’t care to listen. Cathie Wood recently took to Bloomberg to talk about potential ways of incorporating bitcoin mining into renewable energy providers’ power grids to capitalize on the intermittent periods when their excess energy is currently wasted. (Wood is CEO of active-ETF manager ARK Invest.) So perhaps bitcoin can actually help take advantage of much more wasted energy than was previously thought.
MarketWatch: So far, we have established that bitcoin is somewhat energy hungry. What is the purpose of all that energy expenditure?
Benfield: Bitcoin’s energy usage makes bitcoin more secure. The cost of attacking bitcoin rises along with the increase in the computational power and the energy consumed by those mining or securing the network.
MarketWatch: We hear a lot about the advent of cryptocurrencies that spend less energy than bitcoin does. What can you tell us about them?
Benfield: Many of the “green” cryptos are marketing their blockchain as energy efficient because this is better than saying that they have underdeveloped networks that nobody is using, validating or mining on. That being said, proof-of-stake cryptocurrencies are typically much more energy efficient and new projects will likely shift their attention toward proof of stake because of the energy benefits.
MarketWatch: Will bitcoin evolve and grow to surpass its hunger for energy? What’s next in store for the world’s most popular cryptocurrency?
Benfield: Much of bitcoin’s energy use to date has been for mining new coins and not the actual processing of transactions. After all the coins have been mined, energy usage is likely to come down, as the act of 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 cut down on energy expenditure by offloading some transaction processing to layer 2s or sidechains. These sidechains or layer 2s would then checkpoint on the bitcoin blockchain, but similar to the lightning solution, individual transactions would be handled off the main chain and the summaries of those transactions would be stored on the main bitcoin blockchain during those checkpoints.
MarketWatch: Finally, is this energy issue big enough to jeopardize bitcoin and cryptocurrencies as a store of value?
Benfield: No, at the end of the day the issue of bitcoin’s energy consumption boils down to whether the consumption is worth it. Bitcoin’s adopters will eventually need to demonstrate bitcoin’s societal value to the world to justify its energy footprint.
There you have it. After having this conversation with Alex, reviewing Nic Carter’s research (the link is above, I highly recommend you read it) and other papers on the topic, it seems that many of the issues concerning bitcoin’s carbon footprint may have been overblown or simply misrepresented.
Determining bitcoin’s effect on the environment requires a lot of big-picture thinking. It is easy to miss the forest for the trees, and easier still to rely on information that has been since debunked, simply because it favors one’s cognitive bias.
The way I see it, cryptocurrencies aren’t going away, and by the looks of it, neither is bitcoin. Current market action looks like nothing out of the ordinary — yet more volatile crypto action, the likes of which we’ve seen in the past. This slump is likely just a pause.
What do you think? Do you support the use of bitcoin or would you rather invest in one of the “green” cryptocurrencies? Which one?
Let me know in the comment section below.