As digital assets are in focus for investors, there is a less visible, less shiny side to at least the Bitcoin story. While the total potential number of Bitcoins is fixed at 21 million, they haven’t all been created yet. New Bitcoins can be ‘mined’ through power-intensive computer analysis, which has a significant carbon footprint, according to Marion Laboure, senior economist at Deutsche Bank in London. There’s also a contrasting view, as set out by US-based portfolio manager Mark L. Casey at Capital Group.
Laboure, who also lectures at Harvard University, presented options for dealing with this challenge at a recent Luxembourg for Finance event. She has researched Bitcoins over the past three years, during which Bitcoin’s market cap has gone from the USD70 billion range to over USD1 trillion. During that same time, Bitcoin’s energy consumption has quadrupled to exceed over 200 terawatt hours.
Laboure described a Bitcoin mining industry that seems heedless of this impact. “We have almost 80 percent of Bitcoin global energy consumption which is generated from non-renewable sources such as coal,” she explained. Given the economic incentives, most miners choose the cheapest, traditional carbon-emitting sources.
Energy intensive by design
Mining a single Bitcoin, she explained, involves a carbon footprint greater than that of processing nearly 2 billion Visa transactions. Bitcoin’s annual energy consumption could power half of UK household needs. “Many cryptocurrencies like Bitcoin are energy intensive by design,” she explained, in order to slow down the process of generating new ones.
Laboure presented several options for reducing this climate burden. China has banned Bitcoin mining, partially because of its environmental impact. It has gone from accounting for 75 percent of global mining activity to “officially zero”. A less aggressive approach is to use tax measures to encourage Bitcoin miners to use renewable energy. El Salvador is, interestingly, trying to encourage the use of volcanic energy.
Proof of stake
One option to disincentivise carbon-fuelled crypto mining, Laboure suggested, is through a tradable right to emit. Another is to switch Bitcoin mining from its current ‘proof of work’ protocol to ‘proof of stake’. This is done by the Lightning Network, a ‘layer 2’ payment protocol layered on top of a blockchain-based cryptocurrency. Ethereum, the second largest crypto currency by market cap, plans do this by the middle of this year. Yet another way is to ‘pre-mine’ the Bitcoin, ”so that no more energy is required to mine a new token”. This is done by the XRP cryptocurrency.
Laboure mentioned the private sector Crypto Climate Accord, which aims to decarbonise the industry through greener blockchain technology, carbon accounting and carbon offset procurement. She also pointed to the European Parliament’s proposed green amendment to the Markets in Crypto-Assets (MiCA) regulation.
Bitcoin is already green
Not everyone agrees with this perspective. “I think Bitcoin has a great energy consumption story,” said Casey, during a Capital Group event earlier this year.
Casey argued that Bitcoin miners consumer 1/1000th of the world’s energy. “It’s negligible, and it will always be a rounding error,” even if Bitcoin prices soar, he said.
Now that Bitcoin miners have been “kicked out of China”, he said, it has become one of the greenest industries in any comparison. “Bitcoin miners are uniquely well-positioned to take advantage of intermittent forms of energy, like the temporary oversupply of hydro power during the rainy season.”
Repressive regimes
Casey took issue with a related argument that using energy to make Bitcoin is frivolous. He pointed out that “half a billion people live in repressive regimes where they really don’t have property rights over their money” and who in his view, stand to benefit from using a currency their government doesn’t control.
In terms of alternative cryptocurrencies, key to some of Laboure’s options, Casey has been dismissive. “What I find interesting is, so far the Bitcoiners have looked at these 10,000 options to diversify away from Bitcoin, the real thing, into some other thing and they’ve all said ‘no’.”