Is Bitcoin bad for the environment?

Bitcoin's Impact On The Environment
Learn Crypto Blog Learn Crypto Blog
Learn Crypto Jul 05 · 13 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?

Bitcoin mining predominantly occurs in purpose-built farms that are essentially big warehouses full of specialist computers working solely to verify Bitcoin transactions - adding them into new blocks in the Bitcoin blockchain -  through its proof-of-work consensus mechanism.  

Proof of work is hard for newcomers to crypto to wrap their head around. In order for Bitcoin to function as a monetary system with no central authority, it needs an automated way for the network to agree on valid transactions that cannot be corrupted. Proof of work is the solution; a race to find a random number where the effort/reward logic discourages bad actors.

This lottery runs every 10 minutes, regulating the addition of new blocks and paying out a reward  - currently 6.25 BTC plus transaction fees; this process is known as mining. As the value of bitcoin increases, the more incentive there is to mine but through something called difficulty adjustment, the search for the proof or work gets harder.

So a natural consequence of Bitcoin's network becoming more secure, and therefore a better store of value,  is an ever increasing energy requirement. 

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 is 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 mining & the free market


Bitcoin is a part of the 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 aluminium 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? 

39%

The % of Bitcoin Mining generated from renewable energy sources

The value of Bitcoin 

Humanity needs money. Its use emerged in different forms independently around the world, and money has continued to evolve to enable us to essentially store energy and move it through time and space.

Bitcoin is the first digital solution to this need, that cannot be counterfeited and does not need a central authority. Bitcoin’s value is a recognition of this revolutionary breakthrough. 

It enables people to easily send money abroad; others see it as a valuable hedge against inferior 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 local 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 - saw significant economic growth through the stability of the gold standard. 

And Bitcoin hasn’t really even got going. it is primarily used as digital gold but scaling is coming. The crypto industry is young, but is experiencing 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 as an idea in the 1960s but didn’t start making a real commercial impact until the 90s.

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 back in 2008 were estimated to burn 6 billion kilowatt hours every year, which at the time was more than the entire energy consumption of El Salvador.

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?

6 billion

The number of kilowatt hours estimated to be burned annually by Xmas tree lights in the USA in 2008

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?

Bitcoin's rise to a trillion dollar asset has happened at such an astonishing pace that we forget how immature a technology it is. If you're old enough to remember the inefficiency of dial-up modems, and compare them to the speeds of 5G available walking down the street, you can appreciate how rapidly technology can improve.

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. 

We're already seeing innovative ways to recycle the heat produced by the mining process. As an example, a small farm in Quebec is using the heat generated from crypto mining to grow strawberries in Winter, but doing it in a carbon neutral way.

On a wider scale the industry is adapting to this challenge with businesses emerging to take advantage such as Mint Green co-locating bitcoin mining facilities with industrial plants, to produce two revenue streams - mined crypto and heat.

Another good example is Greenbit in Estonia, applying their existing expertise in generating electricity from wind and solar, and applying this to crypto mining.

Bitcoin may not have a PR team, but the issue of energy consumption isn't going away, so there is a recognition of a need for a culture of sustainability:

Jeff Booth’s excellent book ‘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. 

There is even a strong argument that Bitcoin can drive a clean and abundant energy future, which has been made in a joint paper by Square and Ark Investments.

"The Bitcoin network functions as a unique energy buyer that could enable society to deploy substantially more solar and wind generation capacity. This deployment, along with energy storage, aims to facilitate the transition to a cleaner and more resilient electricity grid. We believe that the energy asset owners of today can become the essential bitcoin miners of tomorrow."

Quote source: Bitcoin is Key to an Abundant, Clean Energy Future, April 2021

Norwegian billionaire, Kjell Inge Røkke, revealed in March 2021, that  holding company Aker had established Seetee, a firm dedicated to investing in Bitcoin and the Bitcoin ecosystem. Key to that was a commitment to facing the issue of energy consumption:

See­tee will es­tab­lish min­ing op­er­a­tions that trans­fer strand­ed, or in­ter­mit­tent elec­tric­i­ty with­out sta­ble de­mand lo­cal­ly—wind, so­lar, hy­dro pow­er— to eco­nom­ic as­sets that can be used any­where. Bit­coin is, in our eyes, a load-bal­anc­ing eco­nom­ic bat­tery, and bat­ter­ies are es­sen­tial to the en­er­gy tran­si­tion re­quired to reach the tar­gets of the Paris Agreement. Our am­bi­tion is to be a valu­able part­ner in new re­new­able projects."

You can read Rokke's full investor letter here, which is a great example of someone that has done the deep dive into Bitcoin, understood the benefits and the challenges, and found a progressive path forward.

Not everyone, however, takes this measured approach. The energy consumption argument has become a key line of attack for those that oppose Bitcoin, and is also a means to politicise the wider debate about adoption.

This came clearly into focus when Tesla did a monumental u-turn on their support for Bitcoin. The timing and context are so perplexing it led many to believe that there was a political angle to the story, given Tesla's receipt of government subsidies:

If crypto is to deliver on many of its goals, either energy production will become more efficient or a new consensus mechanism will likely replace proof of work. For now, while it is contributing to our environmental impact, it is worth putting arguments against Bitcoin 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.

For its part, Bitcoin industry as a whole needs to work to improving mining sustainability and improving the visibility of any positive measures. Given that Bitcoin is an open-source technology this presents a real challenge. There is no PR department to spring to its defence. Interestingly, a move in this direction happened at the recent Bitcoin2021 conference in Miami.

Michael Saylor, Bitcoin evangelist and  CEO of the largest single institutional Bitcoin investor - Micro Strategy - brought together representatives of the biggest North American mining operators, along with Elon Musk, to create an informal alliance - the Bitcoin Mining Council.

The Bitcoin Mining Council is a voluntary and open forum of Bitcoin mining companies and other companies in the Bitcoin industry committed to the Bitcoin network and its core principles. It promotes transparency, shares best practices, and educates the public on the benefits of Bitcoin and Bitcoin mining.

The Bitcoin Mining Council is trying to counter some of misinformation about the environmental impact on mining. It recently received a statement suggesting that 56% of Bitcoin mining now comes from renewable sources. The significance of this is that Elon Musk put a requirement of at least 50% of Bitcoin mining to come from renewables for Tesla to reconsider their acceptance of Bitcoin as a payment method for their electric cars.

Though the appearance of this voluntary forum may appear, on the face of it, good news for Bitcoin, not everyone saw it that way. Bitcoin is apolitical, so the idea that a small elite group might position themselves as 'unofficial' spokespeople appeared to some as a power grab.

This illustrates the challenges Bitcoin faces remaining a decentralised system yet somehow responding to coordinated criticisms - especially in relation to environmental impact - that can meaningfully impact its adoption.