Both the hardest critics and proponents of cryptocurrencies like Bitcoin can agree on the fact that, for better or worse, these digital currencies are fundamentally different from fiat currencies. One of the under-discussed differences between these two currencies is their energy consumption.
In a 2022 report, the Cambridge Centre for Alternative Finance (CCAF) estimated that Bitcoin alone consumes 131 TWh each year, or 0.59% of the world’s electricity production, more than the Netherlands or Argentina.
The vast majority of this power is used to mine Bitcoin and run the network, due to the proof-of-work nature of Bitcoin and other leading cryptocurrencies. In order for Bitcoin to verify and add new transactions to the blockchain, it uses the proof-of-work consensus mechanism that enables virtual miners to earn Bitcoin by confirming transactions. While this method is extremely secure, it is also extraordinarily energy intensive.
The undeniable environmental impact of crypto mining has opened Bitcoin up to criticism from environmental activists that are concerned about the potential for the energy used by Bitcoin to massively increase as it becomes more widely used.
Unlike Bitcoin, Ethereum and a number of other cryptocurrencies use a proof-of-stake consensus mechanism that replaces miners with validators who stake crypto for the opportunity to validate blocks and earn a reward for this service. As a user must purchase and hold Ethereum, or another proof-of-stake cryptocurrency, to earn a reward, they benefit from the continuing survival of the cryptocurrency.
Paper or digital?
Even with the high level of energy used by proof-of-work based cryptocurrencies, fiat currencies and the global banking system are also responsible for a great deal of energy usage. When physical banking networks, ATMs and data centres are added up, it has been estimated that the global banking system accounts for 100 terawatts of energy usage per year.
Advocates of bitcoin and similar crypto currency is also point to the fact that a large proportion of the energy that these digital currencies use is renewable. A study published by Coinshare found that almost three-quarters of energy powering the Bitcoin network comes from renewable sources, namely wind, solar and hydropower.
Many of the industries that exist today use an extremely large amount of energy to operate but are widely deemed to be an essential part of modern life. For example, despite high-profile efforts to reduce carbon emissions from fast fashion production, this industry still ranks as a mega polluter.
Some supporters of Bitcoin believe the benefits of such technology outweighs the energy usage downsides of crypto mining, especially as efforts to reduce the impact of mining these digital currencies is being actively pursued by developers and leading companies in the sector.
In the near term, however, the energy used in the Bitcoin network is only expected to increase as its popularity grows. But as climate concerns continue to become one of the leading issues for countries around the world, this may embolden dominant industry players to put reducing carbon emissions at the top of the agenda.
Written by Finbarr Toesland, Editorial Contributor
The conversation on cryptocurrency and consumption continues at FTT DeFi, on the 12th July 2022 at County Hall, London.