Is Bitcoin Bad For The Environment?

Learn Crypto Blog Learn Crypto Blog
Learn Crypto Apr 15 · 8 min read
  • What is the source of the energy used in Bitcoin;s mining process?
  • How does Bitcoin compare to the energy consumption of existing monetary systems?
  • How do we decide whether Bitcoin’s energy consumption is justified?
  • How will Bitcoin’s energy requirements change over time?

Bitcoin’s ascent in 2021 to a $1trillion asset is providing vindication of its function as a digital store of value. At the same time, however, this meteoric increase in value is drawing attention to the parallel increase in energy required to maintain the integrity of the Bitcoin network. Is Bitcoin actively contributing to the ongoing climate emergency or is this just more anti-crypto FUD?

There is no debate that Bitcoin’s mining process - also known as proof of work - does burn a large amount of energy. But if we are trying to understand the environmental impact of that energy requirement we need to look at several key questions.

What is the source of Energy used to mine Bitcoin?

Mining predominantly occurs now in farms that are essentially big warehouses full of specialist computers working to verify Bitcoin transactions through its proof-of-work consensus mechanism.  

The system pays Bitcoin as a reward for this work, and the process is known as mining. As the value of Bitcoin increases, the more incentive there is to mine; hence more energy is expended on the process. 

Energy is required to both power the purpose-built mining rigs, and to keep them cool. They have no other useful function.

The majority of this energy comes   from fossil fuels, and thus there are significant C02 externalities associated with Bitcoin. However, the picture isn’t that black and white as a recent study has estimated that 39% of proof-of-work mining is powered by renewable energy, primarily hydroelectric energy, while 73% use renewables in some form

So while yes, Bitcoin contributes to C02 output, fossil fuels do not entirely power its energy consumption, and given trends toward growth of sustainable energy (addressed below) we should expect that balance to shift away from fossil.

It’s also important to understand where this energy consumption is taking place and how the global energy markets work. The majority of Bitcoin mining occurs in China, where there are significant energy surpluses due to their hydroelectric infrastructure. 

Electricity cannot be infinitely stored, and there are significant losses when it’s transported. Locating Bitcoin mining factories in areas with excess electricity that would otherwise go to waste if there wasn’t local demand for it makes sense. 

This is the free market at work, and to fully understand the debate around Bitcoin’s environmental impact, this context is crucial. The critical discussion in climate change is that the free market fails to price the negative externalities associated with carbon output correctly. 

Bitcoin is a part of this free market system, but it is not an underlying cause of it, rather a symptom. In a world without cryptocurrency or Bitcoin, other industries would fill the demand for energy, such as data storage or aluminum production. 

The counterargument to this is that Bitcoin is an industry that isn’t providing value for the energy costs it produces, bringing us on to the key underlying issue. What is the value of Bitcoin, and is it worth the energy costs associated with it? 


The % of Bitcoin Mining generated from renewable energy sources

The value of Bitcoin 

Bitcoin’s value is as sound money separated from the need for central authority control over it. Bitcoin’s value has reached thousands of US dollars because it is increasingly seen as a worthy store of value. 

Some gain value from easily sending money abroad; others see it as a valuable hedge against other value stores such as fiat currency or gold, while the premium paid in countries like Argentina, Turkey and Venezuela illustrate the demand from citizens lacking a stable currency. 

The benefits of sound money are almost impossible to quantify, though anecdotally, La Belle Epoque aka the Gilded Age from the mid-1800s to the beginning of the 20th century say significant economic growth through the stability of the gold standard. 

 As yet Bitcoin hasn’t produced scalable applications beyond a digital gold. However, the crypto industry as a whole is young, and in the past few years, there has been an explosion of projects aiming to bring scalable applications to the industry. 

The potential for these applications certainly exists, but it takes time for these things to be developed. For example, take the internet, which first emerged in the 1960s but didn’t start making a real commercial impact until the 80s. Bitcoin (and blockchain as we know it) was invented in 2008/9, and to say that there is no chance for more comprehensive commercial application of this technology may be misunderstanding how technologies have historically developed.  

Any arguments around the future economic value of Bitcoin will remain unresolved, though we can surely agree sound money is worth expending energy to create and maintain. Though this naturally leads to comparisons to our current monetary systems.

Comparing Bitcoin’s Energy Consumption to Visa

 Does it make sense to compare Bitcoin’s energy efficiency with the most commonly used payment system -  VISA? For starters, we aren’t comparing apples with apples. 

Bitcoin is an entire monetary system that doesn’t rely on any central authority, only the internet. Whereas VISA is just one layer of the US Dollar system, dependent on infrastructure maintained by central authorities such as the Federal Reserve, Commercial Banking System, the US government and even the might of the US Army to maintain geo-political stability.

So any discussion around comparative energy efficiency needs to consider the energy consumption of these central authorities - Bitcoin Proof-of-Work vs the US FInancial system in its entirety.In which case, Bitcoin’s energy consumption perhaps isn’t so exorbitant.

Is Bitcoin’s Energy Consumption Justified?

To say that Bitcoin doesn’t have value is counterintuitive because the market has deemed it to be valuable. The question therefore, is not about objective economic value  but subjective worth. Remember the classic aphorism: economists know the price of everything but the value of nothing.

Again here, we run into philosophical difficulties. Should we be singling out a specific technology for its environmental impact, when its energy consumption is entirely legal, 40% is from renewable sources and much of the other 60% comes from surplus production?

Whatabout arguments tend to generally be viewed as throwing shade, but you can really look at any non-essential pursuit and question its validity. 

Energy accounts for 9% of GDP globally - in other words €1 in every €10 of productive economic activity comes from the energy industry. Is all that energy generation justified? 

Playing video games, social media, foreign travel, manufacture of any leisure item, especially clothing. The list is endless and the argument gets snagged on the age old question of whether markets should decide value or governments.

Dan Held, one of crypto’s big influencers, draws a great analogy with Christmas Lights, which are estimated to burn 6 billion kilowatt hours every year.

Bitcoin is a favourite of Austrian Economists who certainly fall in the former camp - an unfettered market should decide - and though the current climate emergency suggests that capitalism has failed to price in industrial externalities, is Bitcoin the fall-guy for 150 years of rampant pollution that has created the kind of inequalities Satoshi Nakamato’s invention is trying to redress?

Similar arguments have been used by the developed world against the developing world and its energy consumption - in a sense pulling up the drawbridge and ignoring the past, but this ignores the changes that technology will bring to the costs of renewable energy generation:

How Will Bitcoin’s Energy Requirements Change Over Time?

Any assessment of the environmental impact of Bitcoin is based on both the current technology being employed for mining and for energy generation. In both cases there is reason for optimism.

The kinds of machines that mine Bitcoin have changed significantly since the Genesis Block becoming ever more efficient and this should be expected to continue.

Bitcoin’s reliance on mining is actually finite as the cap of 21 million coins is expected to be reached around 2140. It is hard to model forward energy requirements, but at least we know that the existing protocol mandates that mining will end at a fixed point in time.

At the same time as the mining process becomes more efficient, with old rigs quickly retired for being uneconomical, we should expect dramatic increases in the efficiency of energy production itself. 

Jeff Booth’s excellent ‘The Price of Tomorrow’ makes a strong case for the deflationary pressure of technological advancements including the decreasing marginal cost of energy production. 

“The timing may be uncertain, but the path towards abundant renewable energy is not….[in the future] we can get all energy required for nearly free”

The Price of Tomorrow, Jeff Booth.

One particularly promising area of renewable energy development is solar. Solar energy costs have dropped by a factor of 5 since 2010. Forecasts have consistently underestimated this price drop over the past few years and now conservative estimates are claiming that by the 2030s Solar will be cheaper than fossil fuels in most places. With Bitcoin’s mining set to be completed around 2140, it seems that cheap renewable energy could be powering it for the majority of the mining period.

The abundance of cheap energy will be a game changer for Bitcoin’s environmental impact, though not necessarily positive for price. 

What we do know is that the relationship between energy consumption and transaction throughput has been remarkably consistent from 2010-2020. This suggests that Bitcoin’s energy requirements aren’t simply supporting increasing price, but the other way around. 

Price is increasing because of network effects and adoption, which are stable proportionate to the energy required to process transactions.

The future for Crypto and the Environment

Overall, the answer to this question still comes down to whether or not you think Bitcoin and the blockchain have the potential to produce value over time. Currently, Bitcoin is significantly contributing to global C02 emissions but this must be seen as a symptom of our current energy markets rather than a primary cause.. 

As an industry, crypto is full of people and projects aiming to make the world a better place. It’s aware of its current carbon output, and many projects are working to address this, such as Ethereum aiming to switch to a new consensus mechanism known as Proof of Stake. 

In theory, this mechanism will have a much lower environmental impact as it wouldn’t incentives nearly as much energy consumption as Proof of Work. 

If crypto is to deliver on many of its goals, a new consensus mechanism will likely replace proof of work. For now, while Bitcoin is contributing to our environmental impact, it is worth putting arguments that view this as a fatal flaw into the context of our current free market for energy production and consumption. 

If we address our inefficient energy consumption and subsequent environmental impact, we need to focus on our market systems rather than scapegoating particular industries such as crypto. Blockchain technology could likely be part of the puzzle in solving inefficient energy consumption as we advance. 

So yes, criticism and awareness of the current issues surrounding Bitcoin’s environmental impact are essential. But it’s also necessary to understand these issues within their context and work to improve the industry rather than disregarding the technology entirely.