Bitcoin is once again in the mainstream news, but for some of the wrong reasons. Cryptocurrency has had quite the year so far. Its value reached historic, it received support from major worldwide names and then crashed. Again. As it does all the time. It also got the attention of governments, but again, for the wrong reasons, however this time some of them acted on their concerns and issued bans.
The reason though is somewhat surprising – but not to those who are into cryptocurrencies. The reason it’s piqued such interest is mainly to do with the energy that goes into mining cryptocurrency – and that’s a lot of energy. So much so, that according to some estimates, it could power an entire country the size of Pakistan!
How much energy?
It’s difficult to know the exact energy consumption that goes into Bitcoin mining as there are a lot of variables: What are the types of the machines that mine, how many of their resources are used, for how long are they used, what are their energy sources and so on. But there are ways to calculate these estimates and they show a constant rise in the energy consumption of Bitcoin.
For example, as of the end of May 2021, Bitcoin mining required 122.92TWh per year. It’s not a pretty picture when we look at the energy needed to process a single Bitcoin transaction – 1432.28kWh. This is enough to power an average U.S. household for 49.09 days. Yikes.
This leads to another problem which is the real issue: Energy is expensive. But in order to mine with maximum profit you need as little outlay as possible – this is why some cryptominers relocate to countries where the energy is cheaper so the bills are lower. Or, simply steal. Or do both! When this happens, there are several problems that compound each other.
Electrical grids are unable to cope with these localized power demands and this can cause breakdowns or even worse – insufficient energy supply for the region. Also, cheap power usually isn’t environmentally friendly, so, you also get a massive carbon footprint. It’s estimated that Bitcoin mining in 2021 will generate 58.39Mt CO2 – to put this into perspective – this is comparable with the entire nation of Libya. Just a single Bitcoin transaction generates 680.33 kg CO2 which is the same as 1,507,857 bank card transactions or watching 113,389 hours of videos on YouTube. Double yikes.
So why does all of this happen?
It’s all because of the way Bitcoin works. Everything is based on the Bitcoin blockchain which is a digital ledger containing the information about all transactions with this cryptocurrency. The blockchain guarantees zero fraudulent transactions as each alteration will lead to a change to the ledger and everyone will know.
To process and continue adding to the ledger, you need computing power to crunch those numbers and this is where the Bitcoin mining comes in.
What is Bitcoin mining?
To continue adding to the blockchain, you need to produce blocks; blocks are sets of transactions that have been processed and added to the ledger and once a block is completed it’s added to the chain and a new one begins. This happens once roughly every ten minutes or so.
Simple, right? Well, it was. In order to process and verify these transactions you need a lot of computing power because of the sheer volume of transactions and the number of other miners competing for the prize.
When a block is completed, miners get a reward – a new bitcoin. The trouble is it’s a race – you may complete 90% of a block, but then give up and someone else finishes and verifies it and they’ll get the reward – not you. Or maybe someone else can complete it along with you, but as they did more work than you on that block – they’ll get the reward. Miners compete for the prize which is halved every four years; this is why they need more and more computing power to be able to increase their chances. Hence the massive demand for specialized hardware and video cards as their Graphic Processing Units (GPUs) are more efficient for processing the transactions.
Another way is to join a mining pool where lots of miners use their hardware resources to gain advantage and win Bitcoins more often, then they split their earnings between each other. But again, this is usually done proportionally depending on how much each miner has contributed. So, you may end up investing hours and hours of computing time and energy for a fraction of a Bitcoin which doesn’t even cover your mining costs.
This could lead towards illegal behavior like stealing electricity to lower costs and increase profits, more often though it just pushes miners towards countries where energy is cheap (and as a result – not “green”).
Elon Musk joined the chat
All of this is well known to cryptominers and has been an issue that they discuss all the time but it wasn’t on the mind of the mainstream; that changed when earlier this year Elon Musk announced he always has loved Bitcoin and that Tesla is buying up more than a $1 billion worth of the cryptocurrency. Not only that, he also announced that people could order and pay for Tesla cars with Bitcoin.
As you might expect, this propelled the price of Bitcoin to new heights. It went above $63,000. Then it crashed in typical fashion to $48,000 and then restored some its losses to about $58,000 and then Musk did what he does best and flip-flopped once again.
All of a sudden, he announced that while he’s still a fan of Bitcoin and cryptocurrencies, he no longer supports Bitcoin in its current state. Tesla also stopped accepting Bitcoin as payment and stopped trading with the cryptocurrency. Musk didn’t give a clear answer if the company still holds its Bitcoin investment or not.
The result? Bitcoin dropped like a stone from a plane. During most of May 2021 it lost the majority of ground it built up in 2020. Bitcoin dropped to $34,000 and struggled to maintain any “buy-the-dip” effort.
At the end of May, Musk once again changed his position. He explained the reason for his withdrawal is the ecological factor – Bitcoin consumes way too much energy and generates way too big of a carbon footprint. He also added he’s working with prominent U.S. cryptominers to solve these issues and reduce the emissions from Bitcoin mining significantly.
But wait, there’s more…
As if the Musk debacle wasn’t enough for Bitcoin, the craze drew the attention of China’s regulators towards cryptocurrencies once again. China has never been fond of this financial asset and has been looking to clamp down on it for years and the latest developments gave them just the reason they needed.
“Recently, crypto currency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” three Chinese regulatory bodies said in a statement. As a result, they banned financial institutions and payment companies from providing cryptocurrency transactions. China has already banned crypto exchanges and Initial Coin Offerings (ICOs).
China maintains the position that cryptocurrency trading is very risky and that these assets aren’t supported by real value. The country sees them as easy to manipulate and that these trades aren’t protected by its laws. The new ban forbids companies to provide any services for cryptocurrencies like trades, settlements, clearing and so on. As you can expect, this action pushed Bitcoin prices further down. The Chinese people were among crypto’s biggest fans, users and miners.
Iran struggles, too
During the last week of May, Iran announced its ban on cryptocurrency mining. The ban will last until Sept. 22 2021. The reason is not because of the financial aspect of Bitcoin but the energy it requires. It turns out there’s a slew of illegal cryptominers in the country and they are wreaking havoc on the energy grid. The problem has been going on for months leading to multiple power outages including in the capital of Tehran.
During that time the regulators were looking nationwide for the illegal miners. In January the police confiscated almost 50,000 rigs using 95 megawatts per hour paying at the cheap state-subsidized rates and not the regular ones. The government estimates that 85% of all Bitcoin mining in the country was being done illegally as there are only 50 licensed mining farms and they use 209 megawatts.
That’s not a lot, but when you factor in the illegal mining, the view changes substantially. Analytics firm Elliptic estimates that between January and April 2021, 4.5% of all Bitcoin mining globally took place in Iran. China is still first with almost 70% despite the bans on services, China still hasn’t banned mining itself.
Also in late May, Elon Musk announced that he held “potentially promising” talks with leading Bitcoin miners. After that it was announced that a new Bitcoin Mining Council will be established to improve the cryptocurrency’s sustainability. This Council will develop and publish current and future renewable energy usage ideas to lower the carbon footprint of Bitcoin.
There are no ideas just yet. It seems the main goal of the Council will be to lead by example and promote the usage of green energy sources for Bitcoin mining. This Council will not have a regulatory role; its ideas are merely to bring recommendations and examples of the benefits of using sustainable energy for crypto mining forward.
However, since most of the cryptomining is done in countries where green energy is sparse and expensive, the Council’s ideas probably won’t lead to a massive change – not unless the Bitcoin industry itself doesn’t start to somehow promote the use of sustainable energy for example with bigger rewards for that. Though seems highly unlikely in the current state of the industry.
So, there we have it. Bitcoin mining is indeed bad for the environment. It can change, but it will require a lot of effort. You can start simply by opting for mining rigs or dedicated servers in data centers which are entirely “green” powered. Overall though, a continuous effort from everyone will be needed in order to make sure cryptocurrencies are both wallet and environmentally friendly.
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