Investment management consultant MATTHEW FEARGRIEVE explains how the production of Bitcoin is harming the environment.

Bitcoin consumes a staggering amount of energy. According to the Cambridge Bitcoin Electricity Consumption Index, the entire Bitcoin network consumes more energy annually than countries such as Ireland and Switzerland – combined.

With the surge in Bitcoin’s popularity since 2009, the amount of electricity being used for its production and transacting can nowadays be measured in terawatts. A terawatt is one trillion watts. To give you some idea of the scale of Bitcoin’s energy consumption, the US consumes around three terawatts in a year. Experts believe that Bitcoin currently consumes multiple terawatts in a year.

A single transaction of bitcoin has the same carbon footprint as 680,000 Visa transactions or 51,210 hours of watching YouTube.

paper from 2018 from the Oak Ridge Institute in Ohio found that one dollar’s worth of bitcoin took 17 megajoules of energy, more than double the amount of energy it took to mine one dollar’s worth of copper, gold and platinum. Another study from the UK published last year said that computer power required to mine Bitcoin quadrupled in 2019 compared with the year before, and that mining has had an influence in prices in some power and utility markets.

How can this be?

Bitcoin is carbon intensive because of the ‘mining’ process used to transact it. First, highly sophisticated computers solve extremely complex algorithms to produce new bitcoins. Specialist ‘miners’ then verify the legitimacy of bitcoin transactions on something known as the blockchain.

Earlier in bitcoin’s relatively short history – the currency was created in 2009 – Bitcoin could be mined on an average computer. Only 21 million bitcoins will ever exist, so the more it’s mined, the harder and more complex the algorithms become to access it. This intentionally mirrors valuable commodities which, as they become scarcer, become harder to mine.

As commodities become more scarce, the higher their price. Similarly with Bitcoin. And so it is by design that Bitcoin consumes more energy the higher its price rises.

Now that over 18.5m bitcoin have been mined, production now requires computers big enough to fill whole buildings. These computers require huge amounts of electricity to run.

Bitcoin apologists point to a fact flagged up by the Cambridge Bitcoin Electricity Consumption Index, which is that the energy wasted by plugged-in but inactive home devices in the US alone could power bitcoin mining for 1.8 years.

The defence of Bitcoin’s energy consumption usually invokes cryptocurrency being a global value transfer and storage system that is necessarily costly to maintain. There are economic, rather than environmental, arguments against this stance, that focus on Bitcoin having no intrinsic value (unlike other mined commodities such as gold) and being significantly more volatile than traditional investor safe havens such as gold or the Swiss franc.

Not all crypto enthusiasts share this view, notably the investor of Ethereum Vitalik Buterin who, in an effort to seem cleaner than Bitcoin, is working on changing Ethereum’s mining system. At the moment the system similarly to bitcoin where the most powerful computers have an edge in getting the most bitcoin as computers compete to complete a transaction first. Buterin plans to change Ethereum’s system so that miners enter a pool and are randomly selected to complete the transaction and receive an ether in return. This method is intended to ensure that less electricity will be used to mine the currency.

Proponents of bitcoin say that mining is increasingly being done with electricity from renewable sources as that type of energy becomes cheaper, and the energy used is far lower than that of other, more wasteful, uses of power.

But environmentalists say that mining is still a cause for concern particularly because miners will go wherever electricity is cheapest and that may mean places that use coal. The majority of bitcoin mining takes place in south-east Asia, where coal-fired power stations remain dominant.

China is a prime example of this. China has the most Bitcoin mines. And two-thirds of China’s electricity comes from coal.

Given that Bitcoin mining rigs are mobile, it may be supposed that they will follow the cheapest electricity – which will not be the cleanest.

Consider Elon Musk’s recent US$1.5 billion investment in bitcoin. This is somewhat contrary to Tesla’s stated mission of to accelerating the world’s transition to sustainable energy. It also offsets completely the US$1.5 billion that Tesla received in 2020 through taxpayer-funded environmental subsidies.

There has emerged, coincidentally with the surge in Bitcoin prices, a nascent argument that mining can help utilities become more profitable, whilst using excess energy when it’s not needed for traditional energy demand, which will hasten the shift to renewable energy. But the mathematics invoked to support this view are recondite, to say the least, and many financial and environmental players believe that the argument is a specious one, specially cooked up to help Bitcoin’s PR.

Bitcoin mining will continue to require substantial energy consumption for as long as the digital currency’s price remains high.

The more energy Bitcoin consumes, the more institutional investors will be obliged, by their own governance rules, to treat it as an ESG risk asset. The link between problem and investment is explicit. Bitcoin consumes more energy the higher its price rises. This ought to give the bigger of the most recent Bitcoin investors, like JPMorgan, Morgan Stanley and Goldman Sachs, food for thought.

Indeed, the two major investment trends looming large over the asset management world – Bitcoin’s stratospheric surge and investors’ rush towards responsible investing across all mandates – seem set for a head-on clash, when it comes to Bitcoin.

We may detect a whiff of conspiracy in the way that the environmental consequences of Bitcoin mining – long known to institutional investors – have thusfar been hidden from retail investors. Institutionals have had a hand in the cottage industry of encouraging retail investors to bet on cryptocurrencies, and the concealment from retail investors of concerns about their deleterious social consequences and poor governance protocols can only have been fostered by institutional investors as well as by the mainstream players.

The stakes are high for Bitcoin proponents and investors alike. Either its energy consumption increases with ugly and hard-to-ignore environmental consequences, or the price collapses. That’s a major headache either way for Bitcoin players.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his investing blog here and see his Twitter feed here.

 

Published by Matthew Feargrieve

Matthew Feargrieve is an investment management consultant with more than twenty years' experience of advising managers of investment funds. https://medium.com/@matthewfeargrieve Find out more about Matthew Feargrieve in the links below.

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