Ask CryptoVantage: Is Bitcoin Bad for the Environment?

Why Does Bitcoin Use So Much Energy?

Practically all of bitcoin’s energy use comes from the bitcoin mining process. The mining process is what allows bitcoin transactions to be processed without the need for a central authority such as a bank. Miners compete with each other to try to process transactions in exchange for a bitcoin reward.

Anyone is allowed to mine bitcoin by using mining computers that create “proof of work”. The proof of work mechanism is required to tie the digital currency to an un-forgeable real-world cost, i.e., energy. In an ideal world, we could use a “one person one vote” or “one computer one vote” system. But in a decentralized online monetary system, it is too easy to fake identity and computers can be split into multiple virtual computers to cheat the system. This is why bitcoin requires proof of work, as a “one joule of energy one vote” system.

Proof of Stake

If bitcoin’s energy use is tied to its “proof of work” consensus mechanism, why not use a less energy intensive consensus mechanism instead? Some systems use a “proof of stake” consensus mechanism instead of proof of work, so rather than “one joule of energy one vote” they use “one coin one vote”. At first glance, proof of stake is appealing because it seems beneficial to remove the need for high energy usage. However, proof of stake has a few drawbacks that make it unsuitable for a decentralized digital currency such as bitcoin.

If bitcoin were to switch to proof of stake, the money supply would become more centrally controlled and less evenly distributed. Currently, bitcoin miners must sell the bitcoin they earn to pay for their operating expenses. In particular, they must pay their high electricity bills. This causes the supply of bitcoin to become more evenly distributed through time as anyone can buy the miners’ bitcoin on the open market.

In proof of stake, there are no costs to the miners (other than the small opportunity cost of staking the coins), so miners do not need to sell the coins they earn. Instead, they can keep holding the coins and earning even more through staking, creating a positive feedback loop where the rich get richer and coins become concentrated in a smaller number of wallets.

Bitcoin’s Carbon Footprint

Even though bitcoin’s proof of work requires a lot of energy, miners are always looking for the cheapest energy source. Because of this, much of the bitcoin network is powered by excess renewable energy that would otherwise go unused. Bitcoin mining computers don’t even need to connect to the energy grid.

Some of the cheapest energy in the world is stranded off-grid energy. Mining with stranded energy can lead to energy infrastructure improvements in those areas. It can also reduce greenhouse gas emissions. Mining bitcoin using natural gas that would otherwise be vented into the atmosphere has great potential for reducing greenhouse gas emissions.

Even though there is a strong incentive for miners to use stranded and renewable energy sources, there is likely still a large amount of mining being done using fossil fuels. While it is impossible to calculate bitcoin’s exact carbon footprint, it is estimated that bitcoin’s energy usage causes the equivalent of 12-55 MT CO2 per year (based on data from CBECI and a paper in the scientific journal Joule).

Putting Bitcoin’s Energy Use into Perspective

There’s no denying that bitcoin uses a lot of energy and has a large carbon footprint, but that doesn’t mean it is strictly bad for the environment. This statement is especially true when comparing bitcoin to the systems that it might eventually replace such as gold production and the traditional banking system.

A May 2021 report published by Galaxy Digital Mining estimated that bitcoin uses less than half the amount of energy required for the traditional banking system (114 terrawatt hours per year compared to 264 TWH/y). In addition, gold production uses 241 TWh of energy per year, more than double that of bitcoin. To put these numbers into context, consider the following estimates of energy use:

• Total global energy production: 170,000 TWh per year
• Data center energy usage (Netflix, Amazon, etc.): 250 TWh per year
• US military energy usage: 167 TWh per year
• The University of Cambridge estimates bitcoin’s energy usage to be 69 TWh, although they say it could be as low as 26 TWh

What about the second, third, and even higher order effects that bitcoin has on the environment? That type of study is well beyond the scope of this article, but consider the following points:

• Practically all of bitcoin’s environmental impact comes from the mining process, which means we can fairly accurately understand what the total environmental impact is.
• In contrast, the traditional banking system and gold production both have many hidden costs and environmental impacts that are difficult to understand.
• Bitcoin’s reliance on excess renewable energy could incentivize the development of “clean” energy infrastructure around the world.
• A global bitcoin economy would incentivize long term savings and reduce consumerism and wasteful consumption.

Conclusion

High energy use is essential for bitcoin’s proof of work consensus mechanism to function. Without it, the system could be too easily gamed, significantly weakening bitcoin’s security. Even though proof of stake seems promising at first glance, it reduces energy usage by making a trade-off for reduced security.

Proof of stake also leads to centralized control of the money supply and the rich getting richer. Even though bitcoin must use large amounts of energy, that energy typically comes from “cleaner” than average sources. In addition, bitcoin mining is actually incentivizing clean energy production and reducing greenhouse gas emissions.