Elon Musk’s recent confirmation that Tesla is likely to resume accepting Bitcoin payments represents a strong recognition that mining activities are showing encouraging signs of shifting towards renewable energy.
Having expressed concerns over the cryptocurrency’s environmental impact back in May, Musk confirmed in a conversation with Twitter’s Jack Dorsey and Ark Invest CEO Cathie Wood that both Tesla and SpaceX continue to own Bitcoin on their balance sheets and that he is personally hopeful that Bitcoin can overcome the problems posed by its vast electrical consumption.
According to Cambridge Bitcoin Electricity Consumption Index, bitcoin mining uses more than 116 TWh annually, representing an environmental footprint comparable to that of the UAE. This means that despite increased use of renewables, bitcoin mining still has a long way to go before it can be considered “green”.
The reason bitcoin mining has a large environmental cost is because the process involves solving complex mathematical problems with specialist computer equipment. As more bitcoins are mined, these mathematical problems become increasingly difficult to crack. In turn, computing equipment with greater processing power is required and unsurprisingly, this computer equipment needs an inordinate amount of energy to run, powering more than 150 quintillion attempts at solving the necessary equation each second worldwide.
Considering the vast amounts of energy required, miners will often gravitate to wherever electricity is cheapest. For many, this means China: a country that has been moving towards renewable energy sources, yet still uses coal for over two-thirds of its electricity. With no government body or organisation tracking bitcoin mining, it is impossible to know if mining operations are powered by renewable energy sources or harmful fossil fuels.
To make matters worse, it is anticipated that bitcoin’s carbon footprint will only grow exponentially. This is because as the value of the cryptocurrency rises, so too does competition for each bitcoin, driving an increase in energy consumption.
In light of bitcoin’s environmental cost, some have turned their back on the cryptocurrency, such as Professor Brian Lucey at Trinity College Dublin who denounced bitcoin as a ‘dirty currency’.
Nonetheless, it is becoming increasingly apparent that bitcoin is here to stay. With its power to change our world for the better by preventing fraud, providing digital wallets, and replacing outdated systems with more efficient ones, bitcoin may even become the basis for our financial system in the future. Therefore, it is hugely important that we do not write off the cryptocurrency but prioritise working together to make bitcoin greener.
Fortunately, there are a number of solutions available that can help bitcoin miners reduce their environmental impact. I propose two places to start.
Firstly, cryptocurrency miners can shift from a ‘proof-of-work’ system to a less-energy intensive ‘proof-of-state’ model. This means miners can do away with running a network of computers simultaneously when a transaction takes place. Instead, a ‘proof-of-state’ system allocates coins to users who put up coins for collateral. Using far less electricity to mine the currency, this model has been adopted successfully by Cardano, which now claims to be four million times more energy efficient than bitcoin.
Secondly, continuing to make the transition towards using clean energy sources will play an important role in reducing the environmental impact of bitcoin mining. Success has already been witnessed in Norway and Iceland, where almost 100% of all energy production is renewable. Subsequently, cryptocurrency miners in these countries have been able to take advantage of cheap hydro-electric and geothermal energy to power their machines.
However, for renewable energy to power bitcoin mining globally, green energy sources must be priced competitively. Fortunately, the cost of renewable energy continues to fall. As Don Wyper, COO of DigitalMint explains: ‘In its current status, the infrastructure that supports the bitcoin protocol cannot be sustained but the beauty of the protocol is that the incentive structures will force miners to adopt the cheapest form of electricity, which in the near future will be renewable energy’.
To accelerate bitcoin mining’s energy transition, it is important that impact investors such as myself prioritise renewable energy projects to create incentive structures to encourage more cryptocurrency miners to go green.
Musk’s tentative return to bitcoin on the basis of its reduced carbon footprint is a welcome sign. However, it is clear bitcoin still has a way to go before it can be considered environmentally friendly. To accelerate its transition, we need to keep up the pressure.