Bitcoin, Ethereum and other proof-of-work cryptocurrencies might have enjoyed a bull run since the end of last year, but if they are not good for the planet, eco-conscious millennial and gen-z investors could be turned off
Even in the notoriously volatile world of cryptocurrencies, it has been an incredibly turbulent few weeks for Bitcoin, the founding crypto. In mid-June, El Salvador became the world’s first nation to approve Bitcoin as legal tender.
A month earlier, Elon Musk first backed away from accepting Bitcoin payments at Tesla, citing the environmental effects of the energy-intensive mining that goes into validating transactions. Then, a week later, he introduced the idea of the Bitcoin Mining Council to monitor and improve the industry’s sustainability.
Understandably, these positive and negative developments impacted the stock market price of Bitcoin, as well as the values of a cluster of other cryptos that typically take their lead from Satoshi Nakamoto’s pioneering digital currency. In February, following a months-long bull run, Bitcoin – whose genesis block was mined in January 2009 – hit a market capitalisation of $1 trillion for the first time. The asset’s acceleration of nought to one trillion in just 12 years was easily the quickest in history. (The “big four” – Apple, Google, Amazon and Microsoft – took 33 years on average to reach $1tr.)
However, while crypto investors are used to the ups and downs, could growing worries around energy consumption derail the rollercoaster? Given the popularity of cryptos among younger people, in particular – 77% of investors are under 45, according to a study published earlier this year by Gemini Exchange – and their supposed eco-conscious sensibilities, do Bitcoin and other energy-draining cryptocurrencies need to change direction, and clean up their acts?
Investors aside, environmental concerns are understood to be behind China’s recent crypto crackdown. The vast majority of crypto is mined in China, driving up energy demand and making it hard for the country to achieve its net-zero emissions by the 2060 target.
Solving the proof of work energy issue
The recent skyrocketing of Bitcoin’s value has triggered new interest, which has led to a surge in mining and energy consumption, as individuals and mining farms alike have invested in hardware to dig for digital gold.
“Bitcoin’s energy consumption has more than quadrupled since the beginning of its last peak in 2017, and it’s set to get worse because energy-inefficiency is built into its DNA,” posits Charles Hoskinson, co-founder of Ethereum – the second-largest crypto by market capitalisation – and, as chief executive of global blockchain engineering firm IOHK, the driving force behind Cardano.
The Hawaii-born entrepreneur points out Bitcoin’s carbon footprint will “become exponentially worse because the more its price rises, the more competition there is for the currency” and thus the more energy it consumes.
As a leading “green crypto”, Cardano stands to benefit from the furore around Bitcoin’s energy problem. It uses a proof-of-stake protocol that requires considerably less energy than proof-of-work chains used by Bitcoin and Ethereum. Hoskinson reckons the Cardano network uses 6 GWh annually – less than 0.01% of the 110.53 TWh needed by the Bitcoin network, as estimated by the University of Cambridge.
Currently, Bitcoin would rank as the 32nd highest energy-consuming nation in the world, ahead of the Netherlands. Next is Ethereum, and the pair consumes over three-quarters of the electricity used by all cryptocurrencies. Notably, the other three on the list of the five worst offenders – Dogecoin, Bitcoin Cash, and Litecoin – all use proof-of-work protocol.
However, things are changing rapidly. Notably, Ethereum will shortly be switching to a proof-of-stake protocol that, its creators claim, will reduce electricity consumption by 99%.
And most people inside and outside the crypto space welcome both the Bitcoin Mining Council and the Crypto Climate Accord, which is a private-sector collaboration focussed on making all blockchains carbon neutral by 2030.
Ultimately, perhaps this energy issue is the shake up Bitcoin needs to pave the way for a more sustainable future for the whole digital asset class, even if the founding crypto becomes less attractive to eco-conscious investors.