Cryptocurrencies and Sustainability: the Externalities of Innovation

Bitcoin mining consumes more energy than the entire country of Argentina. This is the cold, indisputable data released by a research from Cambridge University. The number becomes even more impressive if we add to it other cryptocurrencies’ energy consumption. Even if the amount of carbon emissions linked to mining is lower than the one attributed to traditional banking and gold mining, their carbon footprint is still extremely high (37 million tons of CO2 emissions each year). We should therefore realize that something needs to be done on this issue.

First of all, what does “crypto mining” mean?

Bitcoin’s idea is based on the Proof of Work mechanism, a system of transaction validation that allows the structure to function efficiently by limiting fraudulent activities and transactions. This mechanism, called mining, is run by computers which, by working codes and algorithms, certify the transactions and receive a reward in the form of cryptocurrencies. The more popular and valuable a currency gets, the more people find it economically convenient to mine. Therefore, as competition increases, the system becomes increasingly complicated, requiring more computing power and, as a consequence, more energy.

As highlighted, crypto mining requires a lot of energy. For this reason, while the phenomenon has a worldwide diffusion, the major mining facilities are concentrated in lower energy cost areas such as mainland China. China accounts for >65% of hashing, with the region of Mongolia alone, accounting to 8% globally.


Note:


A majority of mining occurred in China, if we look at the hash rate. The hash rate indicates the power of elaboration that a Cryptocurrency network and PCs use to build the blockchain. The more blocks of transactions are processed or hashed, the more the cryptocurrency is being mined.

(source: Statista; https://www.statista.com/statistics/1200477/bitcoin-mining-by-country)

For the above-mentioned reasons, unless prices drop dramatically, energy consumption will further increase in the future. This has interesting implications for those who expect Bitcoin and other cryptocurrencies’ prices to spike since, as prices rise, a negative externality is generated by the increase in cryptocurrencies’ carbon footprint. Such negative externalities are prompting the tech generation to rethink of the trade-off between innovation and environmental sustainability.


To be fair, there are some cases in which the externalities are almost non-existent, as in the Chinese Sichuan region, where miners take advantage of excess electricity, which would otherwise still be produced, but misused. However, on a general level, as long as cryptos work on the PoW system and a large share of electricity is generated by burning coal, the environmental costs are extremely high.


Looking at the future, we are at a crossroad: we can either reduce this practice or use sustainable energy sources. While both solutions are complicated, there are some encouraging examples to bring to the table.

The first is China, the first country in the world for crypto mining, which has taken actions to limit the practice of mining, in a broader effort to reduce energy consumption by 1.9% in 2021. However, unless similar actions taken at the global level, this would just result in moving the mining from a low energy costs country to another. At the same time, as technology advances and people get more familiar with cryptocurrencies, mining limitations are an option which might never be implemented on a global scale.


The second option, instead, looks more promising from a medium-term perspective and there are already some countries moving on this track. The case of Quebec, Canada’s region with the highest mining ratio, provides an example of how eco-sustainability and crypto mining could be going in the same direction. This region offers low energy costs, which allows mining practices to be economically sustainable, and 95% of the energy produced comes from hydroelectric power plants, which allows to reduce the environmental impact of cryptocurrency mining.


Bitfarms (one of the largest Canadian crypto-mining companies) provides a concrete example of how crypto mining could not only reduce its negative externalities on the environment, but even provide an active contribution to sustainability. This company’s largest input, as declared by the President Geoffrey Morphy, is green energy. Moreover, they are planning to provide the heat produced busing their businesses activities as a by-product for other businesses (i.e tomato plantation).


Most miners around the world do not follow such initiatives yet, and it is clear that the energy transition process will require time, but the data look promising. Since the industry’s future depends on this, mining companies are likely to evolve and support a sustainable economic growth. Cryptocurrencies are not ecological by definition but, in 2021, our society has the tools to make them be. Bocconi Students Fintech Society


Author:

Thomas Marchioni


References:

https://qz.com/1982209/how-bitcoin-can-become-more-climate-friendly/

https://www.bbc.com/news/technology-56012952

https://www.forbes.com/sites/rogerhuang/2021/02/16/arguments-that-bitcoin-harms-the-environment-through-wasteful-emissions-miss-the-mark/

https://www.bloombergquint.com/global-economics/bitcoin-rises-after-china-region-declares-war-on-crypto-mining

https://www.cato.org/blog/why-bitcoin-not-environmental-catastrophe

https://globalnews.ca/news/7707405/bitcoins-carbon-footprint-green-applications/