Cryptocurrency and it’s deadly carbon footprint

Cryptocurrency 101

Less than 10 years ago, cryptocurrency was no more than an unusual fad for those with the brain power to get their heads around it. Whilst still requiring brain power to understand, cryptocurrency has proved itself to be far more than just a fad. Nowadays, an estimated five thousand cryptocurrencies exist. Bitcoin is far and away the largest, with a market capitalisation of around £540 billion and the world’s first widely adopted cryptocurrency. In simple terms, the concept is digital money, that allows for secure transactions over the internet without the involvement of a bank, government or other institution. Upon early days, cryptocurrency was mainly used for peer-to-peer transactions but it’s becoming increasingly possible to use it for all sort of different purchases. For example, last year PayPal announced a new service that allowed the buying, holding and selling of cryptocurrency in the UK.

The Security of Cryptocurrency

Cryptocurrencies use blockchain technology to secure transactions. Blockchain first came into prominence as the technology that underpinned Bitcoin in the 2008 white paper, that initially bought the concept into the public eye. In essence, it’s a type of database and acts as a public ledger of every transaction that takes place. The record that’s then held, gets distributed and cannot be tampered with or changed. Cryptocurrency supporters claim that blockchain transactions are more secure than traditional payment mechanisms however with an industry that’s moving at such a fast pace, it’s hard for researchers to validate this.

Other than blockchain technology, cryptocurrencies aren’t regulated. The FCA’s stance on cryptocurrency is clear-cut and warns investors, that if you buy cryptoassets, you are unlikely to have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme’s backing. The current legal status of cryptocurrency varies from country to country; whilst some parts of the world support the use of it, other countries such as Turkey have banned cryptocurrency payments.

The environmental impacts of Cryptocurrency

When first created by Satoshi Nakamoto, a pseudonymous person or team, they stated that no more than 21 million bitcoins will ever be produced, so that the value of it can’t be altered by inflation or manipulated in any way.

Specialized computers known as ‘mining rigs’ carry out the equations required to verify and record a new transaction via blockchain, as explained above. Proof of work is a the most widely used consensus mechanism that allows users to validate cryptocurrency transactions by solving a complicated mathematical problem. The first person that solves the puzzle validates the transaction and is awarded a fixed amount of cryptocurrency. When someone “mines” cryptocurrency, they’re running programs on their computer that are trying to crack the problem. The greater the power behind your computer, the greater chance you have of winning the right to update the blockchain and reap the rewards. In the early days, a typical desktop PC was powerful enough to participate, which allowed for inclusivity of anyone brave enough to try their hand at mining. Nowadays, it requires 12 trillion times more computing power to mine one bitcoin than it did when Nakamoto mined the first blocks in January 2009. You can see how this massively impacts the environment, as miners are incentivized to put more power behind their mining operations to beat their competition.

To contextualise this, just bitcoin alone would be the 23^rd largest energy consumer in the world, if it was a country. And considering there are now over 5000 cryptocurrencies, this is a shocking fact. According to the Bitcoin Energy Consumption Index, bitcoin’s annual carbon footprint is comparable to that of the Czech Republic, at 114.06 Mt CO₂. Not just this, but the specialised hardware that’s used to mine, only has a lifespan of around 1.5 years and as it’s produced with a singular purpose, once it’s obsolete, it becomes e-waste. This e-waste is dramatically increasing every year.

Understanding the true sustainability of cryptocurrency is still an emerging field, and with the decentralization of transactions, it’s hard to pin down whether the resources that miners are using are renewable. There are signs of optimism around the sustainability of cryptocurrency however, as new methods of validation are being created that require much less energy than the proof of work method. Cryptocurrency supporters will also argue the point that it has become a means of democratising the financial industry. Where lack of financial services has been a problem for less developed countries in the past, cryptocurrency has far less barriers to entry. Blockchain has numerous applications for sustainable development such as aiding the traceability and transparency of supply chains, whereas for privatised banks, this is much easier to hide.

The more people learn about cryptocurrency and its varying options, the more hope there is in it becoming more sustainable. Knowledge gives consumers power to decide which crypto to use based on its environmental impact and whether it’s personally beneficial to them over more traditional methods. However, this alone isn’t enough for cryptocurrency to succeed in a sustainable way; all stakeholders, must shift incentives towards more renewable sources from the mining of cryptocurrency to the point of transactions.