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Cryptocurrency and the environment: what you need to know
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In recent years, the meteoric rise of cryptocurrencies has captured headlines, intrigued investors, and disrupted traditional financial systems. Yet, beyond their ability to capture headlines for their market volatility, there's a growing conversation about their environmental implications. Can these decentralised digital assets contribute to the transition to a net zero economy? Or, do they actually increase our carbon footprint? As we delve into the world of cryptocurrencies, we'll explore their intricate relationship with the environment and assess whether they offer a green future or fuel our ecological challenges.
👉 Many are claiming that cryptocurrency is the payment method of the future. But should we be concerned about its environmental impacts?
Cryptocurrencies - an overview
Cryptocurrencies are digital or virtual currencies that use cryptography for security and operate independently of a centralised authority or bank. Here's an overview of the main features of cryptocurrencies:
- Digital - Cryptocurrencies exist solely in electronic form and do not have a physical counterpart like coins or paper money.
- Decentralised - Most cryptocurrencies operate on a technology called blockchain, which is a decentralised system spread across many computers that manage and record transactions.
- Cryptography - The security and integrity of transactions are ensured using cryptographic techniques. This makes it resistant to counterfeiting.
- Peer-to-peer - Cryptocurrency transactions can occur directly between users without the need for an intermediary, like a bank.
- Transparent - All transactions are recorded on the blockchain, which is transparent to everyone and cannot be altered or deleted.
- Limited supply - Many cryptocurrencies, like Bitcoin, have a finite supply, which can create scarcity and potentially influence value.
- Global and digital transactions - Cryptocurrencies can be sent and received anywhere in the world, usually with faster and potentially cheaper transaction times compared to traditional banking systems or money transfer services.
Bitcoin, introduced in 2009, is the first and most well-known cryptocurrency, but there are thousands of others, including Ethereum, Ripple, Litecoin, to name just a few.
❗ It's worth noting that while cryptocurrencies offer numerous advantages like reduced transaction fees, increased financial autonomy, and decentralisation, they also come with risks like market volatility and regulatory challenges.
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How do cryptocurrencies work?
Cryptocurrencies have been hailed as a potential game-changer. But how do they operate, especially when compared to traditional forms of payment?
Peer-to-Peer Transactions:
Cryptocurrencies function using a peer-to-peer system, eliminating the need for a centralised third party to process the transaction. Consider the experience of using payment platforms like Venmo. When you transfer money the platform still interfaces with your bank account to validate the transaction, meaning the payment isn't truly being processed by a single entity. In contrast, with cryptocurrencies, there's no need for a third party's involvement, resulting in a more direct and often quicker method of payment.
Digital Ledger and Encryption:
Instead of routing through a traditional bank, cryptocurrency transactions get documented on a digital ledger. This ledger resides within an encrypted online database, facilitating secure, cashless transactions. Known as the Blockchain, this public ledger acts much like a digital chequebook. But rather than manually jotting down entries, the system automatically generates and logs them.
Immediate Transaction Logging:
Cryptocurrencies offer a distinctive advantage in terms of transaction speed. Unlike the waiting period associated with credit card charges or bank account debits, cryptocurrency transactions get recorded instantly. Not only does the user have access to their transaction history, but this information is also synchronised and stored on the global online database. Such real-time documentation fosters greater financial awareness and accountability for users.
Mining
Mining is the mechanism by which Bitcoin and other digital currencies create tokens and confirm transactions. This requires a global network of computers to validate and protect blockchains, the digital ledgers for crypto trades. In exchange for their processing efforts, these machines earn tokens, creating a reciprocal benefit between miners and the blockchain.
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Why are cryptocurrencies attractive to investors?
Cryptocurrencies have attracted considerable attention from investors for several reasons:
- Potential for high returns - Historically, some cryptocurrencies, especially Bitcoin, have demonstrated significant price appreciation over short periods, leading many investors to view them as high-reward (albeit high-risk) investment opportunities.
- Decentralisation - Cryptocurrencies operate independently of centralised financial systems. This appeals to investors who prefer to have full control over their assets without the intervention or oversight of banks or governments.
- Innovation - The technology behind cryptocurrencies, particularly blockchain, has transformative potential in various sectors, from finance to supply chain to healthcare. Investing in cryptocurrencies can be seen as a bet on this technological innovation and its future applications.
- Transparency - Blockchain's transparent nature means all transactions are traceable and cannot be altered once added. This offers a level of security and transparency that some investors find attractive.
- Liquidity - Major cryptocurrencies like Bitcoin and Ethereum are traded on global exchanges around the clock, ensuring high liquidity levels, and making it relatively easy for investors to sell and buy.
- Global nature - Cryptocurrencies can be traded globally without being tied to a specific country's financial system, making them attractive for international investors or those looking to tap into global markets.
- Hedge against traditional systems - Some investors view certain cryptocurrencies, especially Bitcoin, as a hedge against traditional financial systems, inflation, or economic instability.
- Early adoption potential - As the crypto industry is still in its early stages, many investors believe that investing now might lead to significant returns as the technology and adoption mature.
However, while there are numerous reasons why investors are attracted to cryptocurrencies, it's important to recognise that they also come with substantial risks. The volatile nature of the market, regulatory uncertainties, technological vulnerabilities, and other challenges mean that potential investors should approach cryptocurrencies with caution. Let’s look at some of the drawbacks of this new asset class in the section below.
👉 If you're interested in the investment world, why not take a look at our articles on sustainable investing.
What are the cons of cryptocurrencies?
- Volatility - Cryptocurrencies are known for their extreme price volatility. The value of a cryptocurrency can swing drastically over short periods, leading to significant financial gains or losses for investors.
- Lack of regulation and consumer protections - The decentralised nature of cryptocurrencies means that they often operate outside the regulatory frameworks of traditional financial systems. This lack of oversight can expose users to fraud, scams, and lack of recourse where problems do arise.
- Irreversible transactions - Once a cryptocurrency transaction is confirmed, it can't be reversed. If a mistake is made, such as sending funds to the wrong address, those funds might be lost forever unless the receiver decides to return them.
- Security concerns - While the cryptographic principles underlying cryptocurrencies are generally secure, the broader ecosystem has vulnerabilities. Exchanges and wallets have been targets for hacks, leading to substantial losses for users.
- Potential for misuse - Cryptocurrencies can be used for illicit activities, such as money laundering, tax evasion, or purchasing illegal goods.
- Market manipulation - The relatively young and less-regulated nature of cryptocurrency markets makes them susceptible to manipulative tactics, like "pump and dump" schemes.
- Regulatory and legal risks - As governments and regulatory bodies around the world work to regulate cryptocurrencies, there's potential for restrictive or even prohibitive regulations that could impact their use and value.
- Lack of inherent value - Unlike assets such as gold or real estate, cryptocurrencies don't have intrinsic value or physical form. Their value is largely driven by speculation, market demand, and perceived utility.
- Wallet loss - If a user loses access to their cryptocurrency wallet by forgetting a password or losing a private key, the associated funds become inaccessible. There's no ‘forgot password' option or central authority to turn to for recovery in such cases.
- Environmental concerns - Cryptocurrency mining, especially for currencies like Bitcoin, requires vast amounts of computational power, leading to high energy consumption. This has raised concerns about the environmental impact of large-scale mining operations.
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Are cryptocurrencies compatible with decarbonisation?
“ Cryptocurrencies, most notably Bitcoin, have been a significant point of discussion concerning environmental impacts. Their underlying technology, while considered to be revolutionary, actually comes at a considerable environmental cost. ”
The energy-intensive nature of cryptocurrencies
The environmental impact of cryptocurrencies is intrinsically linked to the escalating demands of mining. Initially, everyday home computers were enough for this task. However, as the challenges grew more complex and competition intensified, the scale of mining operations expanded dramatically, leading to the establishment of vast computer farms equipped with advanced cooling systems.
This evolution in mining demands colossal amounts of energy. To put it in perspective, the White House indicated that cryptocurrency mining releases roughly 140 million metric tons of CO2 annually. This is equivalent to 0.3% of global greenhouse gas emissions, surpassing the annual emissions of countries like Argentina and the Netherlands. Bitcoin's annual energy consumption is estimated to be approximately 127 Terawatt-hours a year (TWh) - which is more than countries like Norway consume.
Another concern is the competitive nature of crypto mining. Due to its inherent design, only the first miner is rewarded, meaning the energy used by all other competing miners is essentially squandered.
And the environmental concerns don't stop with just emissions. The manufacturing of computer chips for mining involves toxic chemicals and precious metals, leading to terrestrial degradation and a depletion of non-renewable resources. Plus, as technology advances, these chips quickly become outdated and end up as electronic waste, adding to the environmental strain.
👉 To learn more about the harmful effects of mining rare earth metals, why not check out our article.
Comparing Cryptocurrencies to Traditional Monetary Systems
To determine just how bad for the environment cryptocurrencies actually are it's essential to consider the environmental costs of traditional monetary systems as well. The U.S., for example, prints vast amounts of cash annually, consuming large quantities of water and electricity. And major banks across the globe have investments tied up in the fossil fuel industry. Yet, even when considering these factors, crypto still comes out on top as the more environmentally damaging asset. In fact, some studies show that, compared to cash, cryptocurrency results in three times the environmental impact.
👉 If you'd like to find out more about why carbon emissions are so harmful to the environment head over to our article on the topic.
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Can cryptocurrencies go green?
However, it’s not all bad news. As awareness of these environmental issues grows, there's a push towards more sustainable cryptocurrency practices.
One key avenue for achieving this is through the adoption of the proof of stake (PoS) validation system, which stands in contrast to the energy-intensive proof of work (PoW) method.
👉 Reminder: Proof of work (PoW) is the mining process used in cryptocurrencies such as Bitcoin. It is incredibly energy-intensive and often relies on non-renewable resources, which can harm the environment.
Proof of stake on the other hand doesn't require energy-hungry mining activities. Instead, it relies on validators who hold and ‘stake’ a certain amount of the cryptocurrency to validate transactions and earn rewards. Cryptocurrencies using PoS are considered greener because they have a minimal impact on the environment.
In addition to PoS, the crypto community is exploring ways to become even more eco-conscious. This includes shifting away from PoW, promoting green practices, being transparent about energy use, encouraging renewable energy adoption, and upgrading mining equipment for greater efficiency. These efforts aim to make cryptocurrencies more sustainable without compromising security.
Case study:
In a groundbreaking move known as ‘The Merge’, Ethereum shifted from its energy-intensive proof-of-work (PoW) process to the more eco-friendly proof-of-stake (PoS) mechanism, aiming to significantly reduce its energy consumption. Data has revealed that Ethereum consumed about 58.26 terawatt-hours (TWh) of electricity between 2015 and the PoS transition, surpassing Switzerland's annual consumption of 54.88 TWh.
After the transition, Ethereum's power demand plummeted from 2.44 gigawatts (GW) to a mere 224 kilowatts (kW) - a remarkable 99.991% reduction. This achievement not only demonstrates Ethereum's dedication to sustainability but also serves as a great example for the wider industry, inspiring eco-conscious crypto projects.
Round up
As the digital revolution continues to reshape the global financial landscape, cryptocurrencies stand at the forefront of this transformation. Yet, the same innovations that promise decentralised finance and enhanced global transactions also pose significant environmental challenges. The crypto realm, acutely aware of its ecological footprint, is witnessing a shift.
Leading the charge, Ethereum's recent transition to a more energy-efficient system underscores the sector's commitment to sustainability. Nonetheless, as we celebrate these advancements, it's crucial to remember that cryptocurrencies such as Bitcoin, with their energy-intensive operations, remain the dominant player. Thus, while the crypto world is indeed waking up to its environmental responsibilities, the journey toward a truly green future is a work in progress.
What about Greenly?
At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required.
If you’d like to learn more about a specific industry, Greenly can help by providing an in-depth industry study, created by our climate scientists.
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