Environmental impact of Bitcoin mining

July 9, 2021 0 admin

Are Bitcoins a threat to the environment?

  • Elon Musk’s recent announcement to stop accepting bitcoins brings back into the spotlight the impact of bitcoin mining on the environment. If bitcoin were a country, it would rank 33rd in terms of energy consumption
  • Although by design bitcoin mining is capped at 21 million and the volume mined halves every year, the rising complexity of the cryptography ensures that continuously more powerful computers are required to solve the puzzles, leading to more energy consumed per bitcoin
  • Bitcoins consume as much electricity as video consoles at 110 terawatt-hours and constitute a minuscule proportion of total electricity consumption for even the top producers
  • 39% of bitcoin mining came from renewable sources in 2019 compared to 28% in 2018 and this number is poised to be heading further up with more hydro and wind energy substitution. China’s clampdown on bitcoin mining may prove to be a headwind to this trend but Musk’s concerns do not appear to be too grave

Tesla’s CEO Elon Musk recently announced that Tesla will not be accepting bitcoins as payments for the purchase of its vehicles citing the environmental impact of cryptocurrency due to concerns over the rapidly increasing use of fossil fuels for bitcoin mining. Musk also announced that Tesla will not sell their current holdings of bitcoins sitting at $2.5Bn and it intends to resume transactions once mining transitions to a more sustainable source of energy.

Critics of Bitcoin have long been wary of its impact on the environment. According to the Cambridge Bitcoin Electricity Consumption Index. As of 2019, bitcoin ranks 33rd when compared to countries on annual electricity consumption basis, and bitcoin accounts for 0.54% of total electricity consumption.

Puzzles to mine bitcoins have become 3 times more complex over the last 1 year

Bitcoin mining is energy-intensive. Individuals, groups, and businesses known as “miners” use specialized hardware to conduct what is known as “bitcoin mining”.

Mining is the process by which blockchain is made. Blockchain technology was first invented in 2008 by an anonymous creator called Satoshi Nakamoto. In cryptocurrencies like the Bitcoin, blockchain is a shared ledger, which is a public record of transactions that is nearly impossible to defraud.

The issue for the environment is that the bitcoin blockchain is based on something called “proof of work”. In proof of work blockchain, the miners or the computers compete amongst each other to add new blocks to the bitcoin blockchain by solving difficult puzzles and calculations. The output provided by miners is called “hash” and the miner that solves the proof of work fastest is awarded a bitcoin on the blockchain.

Satoshi Nakamoto designed bitcoins in such a way that rather than a currency they are supposed to be treated like a commodity and is designed in a way that the calculations for each block becomes tougher and more and more powerful computers need to be utilized. It takes around 10 minutes for them to solve the puzzles and the puzzles are adjusted to be solvable in 10 minutes and thus a new block is added every 10 minutes.

In January 2009, the difficulty of these puzzles was 1.0 and the network hash rate was 4.21Mn hashes per second. Difficulty refers to how hard it is to find a hash that will be below the target set by the system. In March, 2021 the difficulty was around 20 trillion and the hash rate is 150Mn terra hashes per second with terra hashes equalling one trillion hashes. Difficulty of mining refers to how hard it is to find a new block on that day. This difficulty is adjusted depending on how much hashing power is required and bitcoin’s mining difficulty is adjusted every 2016 blocks and since it takes approximately 10 minutes to mine a block, it would take roughly 2 weeks to adjust the difficulty.

Bitcoin mining difficulty- In Trillions (2009-2021)

Source: Coinmetrics

Currently, we are in the first phase of mining and will remain in the first phase until the year 2140 when 6,930,000 blocks would have been mined. For every 210,000 blocks, the coinbase transactions are halved. The coinbase transaction is the first transaction on the block. The miner that successfully processes a block gets a transaction fee, this fee (it includes new bitcoins) is called the coinbase transaction. The coinbase transaction started at 50 bitcoins per transaction (each block is rewarded 50 bitcoins) in 2009 and was at 6.25 per transaction in 2020 due to the halving nature of the bitcoin. By 2140, the coinbase transaction will have no new bitcoin and all bitcoins will have been distributed. This cycle is why bitcoin is capped at 21Mn coins. After all bitcoins are mined, the miners will continue mining since the process includes a transaction fee and the miners will be constantly rewarded.

Bitcoin consumes as much energy as gaming consoles

According to the Cambridge Centre of Alternative Finance (CCAF), bitcoin currently consumes around 110 terawatt-hours per year. If it were a country, it would rank 33rd. But when comparing the energy consumption of bitcoin to the top 10 countries that have mining operations, bitcoin makes up, maximum 1.29% of any country’s total energy consumption.

Bitcoin Mining energy consumption (% of total energy consumption)

Source: Coindesk

Total Electricity consumption- TWh (1990-2018)

Source: IEA

Considering the USA as a reference point, video game consoles make up approximately 0.25% of total energy consumption whereas, construction and commercial cooling make up approximately 2.2% and 2.7% respectively.

About two-fifths of bitcoin mining is green, but…

According to a study conducted by CCAF in September 2020, 39% of total energy consumption for bitcoin mining came from renewable sources in 2019 compared to 28% in 2018 with 76% of miners using renewable sources as part of their energy mix.

Even though the trend is promising, there are several factors that need to be considered. Hydroelectricity is the most common source of energy used by bitcoin miners with up to 62% being used in hashing facilities. Hydroelectricity is sometimes less desirable as it causes damage to the local ecology cause emission of methane. Wind energy on the other hand is cost-effective but wind turbines used to generate wind electricity can damage local wildlife. Solar energy has great potential to be a strong source of energy but lack of technology and possible pollution impact may lead to a downfall. It is important that there is no overdependence on a single energy source and a healthy mix of energy sources are used.

Xinjiang and Inner Mongolia make up a majority portion of the hashrate and both have historically used cheap, plentiful coal power for energy production. But Xinjiang has taken steps towards use of renewable sources of energy while bitcoin mining has been stopped in Inner Mongolia. Compared to traditional mining, bitcoins can be mined anywhere. Almost all energy used worldwide must be produced relatively close to its users but in the case of bitcoin mining, miners can utilize powers even where it is inaccessible. In the monsoon season in Sichuan and Yunnan, huge quantities of hydroelectricity is produced in excess every year and is wasted. In such areas, supply exceeds the local demand and the technology is not advanced enough to store and transport such energy to urban areas where it is required. Such regions are where the majority of the mining takes place.

Share of Power sourcing in Hashing facilities and Average Monthly share of Hashrate

Source: University of Cambridge survey,   Hashrate: The bitcoin hashrate is the total computational power used to mine and process a bitcoin transaction.

Cambridge Centre for Alternative Finance estimates that 65% of the energy comes from China whose energy generation mix is historically skewed towards coal. However, given the recent steps taken by the Chinese government to curb bitcoin mining is likely to change this mix considerably.

Geographical distribution of Energy sources

Source: 3rd Global Cryptoasset Benchmarking Study, University of Cambridge

In May 2021, the State Council’s Financial Stability and Development of China announced that it will reduce bitcoin mining and trading activities in an effort to fend off financial risks. Chinese authorities see cryptocurrency as means to disrupt the economic order and helps in facilitating money laundering and illegal asset transfers. This comes from the fact that China is testing its own digital currency. China will also look to reduce illegal activities in the securities market and aims to maintain stability in the forex, stocks, and bonds markets. This led to the instrument dropping to under $30,000.

China’s ban on cryptocurrency extended to its southwest province of Sichuan where the Sichuan Energy Bureau demanded the closure of 26 suspected cryptocurrency mining projects. Other areas, such as Inner Mongolia, have cited cryptocurrency mining’s use of highly polluting sources such as coal. China’s ban on cryptocurrency mining has had a major impact on the industry. Miners are now dumping their mining equipment and moving to places such as Kazakhstan or Texas. As a result, every mining operation outside China benefits directly. What was surprising is that the crackdown is broad-based and not limited to only non-renewable mining. This may have an adverse impact on the recent composition of hydropower in the bitcoin mining energy mix.

Not as grave a concern as Mr. Musk believes

In April 2020 Ya’an, a city in China’s Sichuan province encouraged blockchain firms to utilize excess hydroelectricity. Such shift to hydroelectricity has aided the use of renewable sources of energy in bitcoin mining. Even though China’s dominance in bitcoin mining has trended down since Q4 FY19, it still boasts two-thirds of the total hashrate.

Bitcoin mining has now increased in parts of North America which has historically depended on non-renewable sources of energy with 62% of energy from fossil fuels. From a sustainability point of view, there is a lot of commitment from industry participants of bitcoin mining in North America. Argo Blockchain and DMG blockchain solutions launched a mining pool exclusively powered by green energy whereas, Gryphon digital mining raised $14Mn to establish renewable energy bitcoin mining operations in the United States.

Since bitcoin mining is still predominantly in China which uses a major mix of hydroelectricity and coal, and government efforts in the USA such as the inclusion in the Paris agreement and the President’s goal to achieve net-zero greenhouse gas emissions by 2050 do not cause a major threat to the environment moving ahead.