The energy use of cryptocurrencies— or crypto—is increasingly under the microscope as these decentralized, digital payment systems become more widespread.
Crypto energy consumption and crypto energy require computing power to exist. However, some fear crypto’s electricity consumption cancels out the benefits of its digital existence. Cryptocurrency mining facilities are simultaneously viewed as saviors and sinners on multiple levels.
Here at Just Energy, we’re in the energy business, so let’s explore the energy sustainability credentials of the crypto space and whether cryptocurrencies will help or hinder the climate change battle.
Crypto Energy Consumption and Crypto Energy: What Is Cryptocurrency?
Cryptocurrency is digital currency. The most well-known of this currency is Bitcoin, which in 2021 had an annual energy usage that exceeded that of Argentina. Most cryptocurrencies run on blockchain technology, a distributed ledger technology (DLT) that allows all users to see every transaction taking place.
These decentralized systems mean all—often thousands or more—of computers verify transactions and records. As such, cryptography provides security. This double-layered system makes counterfeiting or double-spending of cryptocurrencies impossible.
In contrast, think about your banking system. The bank controls what you can spend, where, and how through controlling cash withdrawals, which establishments accept your card, and any associated charges. This traditional centralized system is threatened by decentralized systems controlled by users, not governments or financial institutions.
Many cryptocurrencies require mining to produce their virtual coins. These require miners, who could be anyone, anywhere, anytime there is power and the internet.
How Does Cryptocurrency Mining Work?
People using their computing power to validate transactions on a decentralized blockchain ledger, called mining, need an incentive to do so. That reward is usually the digital currency they are mining.
Bitcoin mining birthed blockchain technology in 2009. Bitcoin transactions on its blockchain are validated by miners using specialized, powerful, and energy-hungry mining rig computers. Miners hash algorithms at incredible rates to try to be the one who validates those transactions and be rewarded with a Bitcoin. All those computers mining for Bitcoin—or any of the thousands of cryptocurrencies—require power.
It’s essentially a massive game of bingo, with miners trying to be the one to guess the 64-digit hexadecimal number the system requires. This system is called proof-of-work (PoW). Those who fail receive nothing for their efforts.
A new block of transactions receives validation about every 10 minutes. At present (January 2024), there are 900 Bitcoins mined daily, resulting in 6.25 Bitcoins paid to a miner every 10 minutes, worth upwards of $250,000 at current market rates for each block validated.
The cryptocurrency’s volatile value, currently between $40,000-$45,000 per coin, gives $36-$40 million of daily rewards. That’s big money. Furthermore, Bitcoin’s once-every-four-years halving event happens in April, reducing Bitcoin rewards to 3.125 coins per new block but possibly driving up the scarcity and, therefore, Bitcoin’s price.
Crypto Energy Consumption and Crypto Energy Demands
The Cambridge Bitcoin Electricity Consumption Index, run by Cambridge University, monitors Bitcoin energy consumption.
As of January 2024, its methodology suggests Bitcoin uses 141-160 terawatt-hours (TWhs) of electricity annually. That’s about 0.6-0.7% of the electricity the world consumed in 2022. Furthermore, it equals all New York State and about a third of Texas’s 2021 electricity consumption.
The race to solve the Bitcoin algorithm has led to the development of powerful mining equipment specialized in outputting super-fast hash rates. The amount of energy required to feed these computers prompted China to ban Bitcoin mining in 2021.
Digiconomist compares the mining of one Bitcoin to more tangible objects, like making a third of an iPad, or “costing” the Earth the amount of water required to fill a backyard swimming pool. Bitcoin scarcity may push its price further upwards, making each mined Bitcoin more valuable and possibly increasing the number of miners and associated energy usage.
Of course, crypto is more than just Bitcoin. The energy consumption of all crypto assets combined is between 0.4% and 0.9% of annual global electricity usage, or 120 and 240 billion kilowatt-hours per year. That’s more energy usage than all the world’s data centers combined. Crypto is a big energy user.
Are Cryptocurrencies Environmentally Friendly?
While in China, Bitcoin miners often took advantage of unused hydropower mixed with fossil fuel-generated power to run their mining equipment. Since that ban, the United States has become the global center for miners, followed by Kazakhstan, where natural gas and coal are a big part of the electricity-generation mix. Russia, Malaysia, Germany, Iran, and Canada are other hotspots.
Current estimates suggest Bitcoin mining spews about 65 megatons of carbon dioxide into the atmosphere every year. However, the latest research suggests that the crypto sphere is starting to clean up its act, with 50% of Bitcoin mining powered by renewable energy sources:
- Hydropower (23%)
- Wind power (14%)
- Nuclear (8%)
- Solar (5%)
- Other renewables (2%)
Around 43% comes from fossil fuel power plants like coal and natural gas. There are, of course, the embedded carbon emissions required to make mining rigs. However, the industry is doing more to reduce its carbon footprint and metrics for greenhouse gas emissions.
What Is the Crypto Climate Accord?
The Crypto Climate Accord brings together more than 250 cryptocurrency and blockchain companies. They aim to reach net-zero greenhouse gas emissions by 2030 through technological innovation and sourcing renewable energy sources.
For example, Blockstream Energy matches energy generators to proof-of-work miners so miners can buy any excess electricity from the grid, no matter how remote the location, reducing energy waste.
Solarcoin looks to change real-world behaviors. People who generate solar power receive a Solarcoin for every megawatt-hour produced. SunContract in Slovenia connects emissions-conscious customers with renewable energy suppliers via its blockchain-based energy trading platform.
However, cryptocurrencies’ underlying basic energy efficiency will likely need to change to alter their environmental credentials and reduce carbon emissions.
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What’s the Difference Between Proof-Of-Work and Proof-Of-Stake Consensus Mechanisms in Cryptocurrencies?
Some of the largest cryptocurrencies, like Litecoin, Dogecoin, and Ethereum, use a lot less energy for mining than the Bitcoin network.
Ethereum became the poster pin-up for green crypto by eschewing Bitcoin’s and its own previous PoW system. Ethereum recently adopted the less energy-intensive proof-of-stake (PoS) consensus mechanism, crashing its electricity usage by 99.9%.
Nowadays, the Ethereum blockchain’s PoS system requires stakeholders with large quantities of Ethereum to act as the validation tool. They “stake” large and valuable amounts of their Ethereum cryptocurrency, called Ether, onto the blockchain. If selected, they approve a new block, and that block’s transactions are added to the blockchain. These stakeholders receive more Ether as their reward.
The process requires a few computers. Any stakeholders approving fraudulent transactions lose their staked Ether, preventing corruption. The system relies on the belief that people don’t want to jeopardize their valuable Ether but want the rewards available from staking it.
Ethereum now uses 2,600 megawatt-hours of electricity annually, a tenth of Airbnb or PayPal’s energy usage, and almost 200 times less than Netflix. The dramatic reduction in electricity costs and usage has even attracted major players like Visa to consider using Ethereum’s blockchain capabilities for payments.
How Are Regulators Addressing the Environmental Impact of Crypto Energy Consumption?
In the United States, the Crypto-Asset Environmental Transparency Act of 2022 requires crypto-mining operations that use more than five megawatts of power to report their carbon dioxide emissions. The Environmental Protection Agency is also assessing the environmental impacts of crypto-asset mining.
The European Union’s EU Action Plan for Digitalising the Energy System is reviewing the energy consumption of crypto assets.
Closer to home in Texas, grid operator ERCOT thinks Bitcoin miners now draw as much electricity from the grid as the Houston metropolitan area. It was hoped that miners would respond to demand response issues—use when demand is low, cease when demand rockets—but that’s difficult to enforce if Bitcoin prices are high.
Furthermore, Bitcoin miner Riot Platforms did follow demand response requests in August 2023 and found itself making millions from ERCOT. The mining company earned credits. It then sold them back when demand soared, making a profit. However, it should be noted that this practice is not new—large industries have employed this tactic for many years and escaped censure.
What Role Does Renewable Energy Play in Crypto Mining Operations?
Crypto mining rigs can be switched on and off quickly, making them compatible with the intermittent nature of some renewable energy sources.
When there’s excess electricity production from renewable energy sources, miners can fire up rigs and help balance the grid, avoiding energy waste. This so-called wasted energy becomes a digital product that many value.
Also, many renewable sources, like hydropower plants or solar farms, are far from the homes and businesses they serve. Electricity doesn’t travel well over long distances; miners close to renewable energy sources are improving the power grid’s overall efficiency.
How Do the Energy Requirements of Cryptocurrencies Compare to Traditional Financial Systems?
Bitcoin’s dominance of the crypto-asset system, value, and energy needs, coupled with its relatively small number of transactions, lead to mixed conclusions.
Cryptocurrency transactions use more energy and emit more carbon emissions than cashless transactions like a Visa or Mastercard payment. Bitcoin is an energy monster in the digital payment sense.
By comparison, old-fashioned cash transactions have a larger carbon footprint than traditional cashless transactions like Visa or Mastercard. That’s because there is a physical product, manual counting systems, transport, ATMs, and so forth.
But which sector requires more energy: Bitcoin or banking? Traditional financial systems require more brick-and-mortar spaces than miners, with employees requiring heating, lighting, furniture, etc. In contrast, a crypto mining rig has very few employees, and its carbon emissions relate almost directly to electricity usage.
However, overall, the banking system requires more energy than Bitcoin. Cash and card transactions still emit fewer emissions than Bitcoin on a per-transaction basis. In the U.S., around three-quarters of all payments are by card. There are relatively few Bitcoin transactions compared to the billions of traditional banking payments made daily.
Challenges and Opportunities for Crypto Energy Consumption and Crypto Energy
Crypto energy consumption and crypto energy are seemingly at a crossroads. More and more people are showing an interest in the crypto-asset space, seeing its utility and potential. But extra scrutiny has led to exposing the energy required to create digital assets that many people, including Warren Buffet, consider worthless.
Bitcoin, the industry’s standard bearer, requires vast amounts of electricity for its proof-of-work systems, which guarantee accountability, to function. The industry is looking at more efficient proof-of-stake systems to reduce its carbon footprint. But what crypto assets also do is shine a light on how many utilities and countries are a long way from being green energy providers.
Yes, Bitcoin and crypto assets have brought more power demands. But gamers in the U.S. alone burn through about a quarter of Bitcoin’s annual electricity usage. Still, there are few headlines about telling people to drop their control pads.
Behind those headlines lies an inconvenient truth: many power grids still rely too much on fossil fuels, let excess energy go to waste, or haven’t upgraded to keep pace with increased energy demands. Crypto’s battle is to convince the public and the markets of its real-world value while not damaging the planet as it does so.
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