Can cryptocurrency investing be climate-friendly?

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13Apr

Can cryptocurrency investing be climate-friendly?

When cryptocurrency hit the scene, there was a lot of speculation and fervor about its potentially world-changing implications. Some early investors made a lot of money over the span of several years. The public conversation around how the technology might change the world, when coupled with excitement about potentially huge financial returns, created a cult-like community of crypto enthusiasts.

In recent years, however, environmentalists and climate activists have been sounding the alarm about cryptocurrencies’ huge environmental impacts. Whether in the realm of energy generation or electronic waste, the sector is now facing something of a climate reckoning, which has prompted some creative innovations. But the question remains: can crypto be a climate-friendly investment choice?

Benefits of cryptocurrency investing

Cryptocurrency investment has earned a reputation as a high-risk, high-profit opportunity. For the early adopters who invested in Bitcoin when it first launched in 2009, some returns hit the millions – and for some, billions – since the asset’s initial value stood at $0. Around 2017, the crypto industry really started to take off, riding a series of ups and downs before Bitcoin settled at a price of about $7,200 at the end of 2019. In 2020, Bitcoin’s price climb started to speed up, hitting a high of $29,000. Then the currency shocked investors again by doubling its value in 2021 – with a dip over the summer – reaching $68,000 by November, and netting Bitcoin miners more than $15 billion in total. But by the start of 2022, the digital asset had plummeted more than 40 percent.

This rollercoaster of lows and highs exemplifies what it means to hold such a volatile asset. Yet despite these risks, many are still holding and buying Bitcoin, with an expectation that the future price will spike. Many investors remain convinced that the currency will eventually surpass a price of $100,000.

While other cryptocurrencies have gained in both recognition and value, Bitcoin remains the industry’s poster child. Nevertheless, rising concerns about cryptocurrencies’ environmental impacts – due in large part, but not exclusively, to their high energy usage – have prompted growing public scrutiny. Here we will now consider the various environmental impacts of cryptocurrency investment.

Environmental impact of cryptocurrencies

Cryptocurrency advocates seek to create a decentralized banking system, in which a limited amount of blockchain-based currencies can run exchanges on specific marketplaces. Cryptos are obtained via “mining,” or the solving of mathematical puzzles with specialized computing systems to produce new coins, which can be done through various strategies.

With the rising popularity of cryptocurrencies, Bitcoin, in particular, stood out as having won its owners great capital gains. Simultaneously, new research has come to light on the technology’s environmental impacts. Bitcoin is therefore a good example to better understand this complex dynamic.

Most bitcoin mines are located in China, where mine servers are heavily reliant on coal for electricity generation. However, mining is now moving to other countries, in the wake of China’s recent crypto crackdown. The best current estimates suggest that Bitcoin mining consumes 121 terawatt-hours (TWh) a year – more than the total energy consumption of Google, Apple, Facebook, and Microsoft combined and comparable to the total energy consumption of countries like New Zealand and Sweden. Shockingly, when compared to other types of currency, a single Bitcoin transaction in 2022 could equal the energy needed to power several hundred thousand VISA card transactions.

Source: Statista (2022)

In terms of global climate transition goals, the best estimates suggest that Bitcoin mining alone could increase global warming by more than 2°C within three decades

Source: Financial Times, 2020

So far, only 39 percent of Bitcoin’s energy comes from renewable sources, predominantly from hydropower. Yet inadequate planning in the hydroelectric sector means that these sources of power can have a higher carbon footprint, in some instances, than even fossil fuels.

To compound the problem, the servers used to mine cryptocurrencies become obsolete roughly every 1.5 years, due to ongoing technological advances. These old servers become electronic waste, or “e-waste,” and end up in landfills. Bitcoin generates an astonishing 30.7 metric kilotons of e-waste annually, an output comparable to the Netherlands’ entire small IT equipment waste.

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Growing public concern

Several climate advocates, including groups like Greenpeace and crypto billionaire Chris Larsen, are launching a “Change the Code, Not the Climate” campaign. Its goal is to pressure the Bitcoin community to change how it orders transactions.  To do so, it will buy ads in leading publications and has already reached out to a dozen key individuals and corporations. These targeted actors, though heavily involved in Bitcoin, have also pledged greater Environmental, Social, and Governance (ESG) compliance.

To achieve success, the campaign is counting on several supporting factors. For one, there’s growing frustration in some U.S. communities that have found themselves unwittingly hosting Bitcoin miners and putting up with the technology’s excessive noise disturbance. After China banned crypto mining last year, these communities saw an influx of miners. Last year, Bitcoin’s environmental concerns came to the fore when Elon Musk announced that Tesla would stop accepting Bitcoin payments until at least 50 percent of its mining is powered by renewable energy.

Climate-positive alternatives

So far, we’ve focused on the negative aspects of cryptocurrency. But that raises the question: are there climate-positive alternatives for the technology?

Switching the mining technique has proven one great way to mitigate the environmental impact of crypto. The proof of stake method, for example, requires 99.5 percent less energy than the more commonly used proof of work method[i]. Cryptocurrencies like Ethereum are transitioning to this model as part of the “Crypto Climate Accord”. Despite some movement, however, experts consider Bitcoin unlikely to switch to this more energy-efficient process, given a lack of incentives for miners and opposition from Bitcoin “diehards” who are fervently against changing the system. Up-and-coming cryptocurrencies like Chia are even trying out the process, which requires less energy but might also generate even more e-waste than the traditional method.

Another idea involves wrapping new Bitcoin tokens with carbon credits and trading the package as a single asset, in order to compensate for its environmental impact. In this regard, there are already some carbon-neutral bitcoin-backed assets like EcoBTC.

There are also several prominent examples of renewables being used to mine Bitcoin. New mining pools like “TerraPool” offer clean energy-powered Bitcoin mining. In El Salvador, Bitcoin has boosted renewable energy development by funding community micro-grids that use geothermal energy. Other novel renewable-based cryptocurrencies, such as Candela, require exclusively solar-powered mining.

Another trend powered by the Crypto Climate Accord has been to improve cryptocurrencies’ greenhouse gas accounting practices while also providing certificates – such as HashRate – that showcase their renewable energy portfolio.

Can cryptocurrency be considered climate impact investing?

Despite all the crypto alternatives described above – which, it should be said, could significantly reduce crypto’s environmental impact and even make it carbon-neutral – the math doesn’t yet add up for the technology to be considered climate impact investing. Cryptocurrencies are neither vital nor necessary to accelerate the climate transition. In fact, they can even dampen efforts to build a net-zero economy. It’s true that cryptocurrencies can be employed to finance and boost renewable energies, but they are still mostly dependent on fossil fuels for power and therefore produce significant climate-damaging emissions. Investing directly into renewable energies themselves, or in Pure Climate Stocks in other relevant industries that are clearly crucial for a cooler planet, would offer a better alternative for a climate-conscious retail investor.

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Proof of work (PoW): Bitcoin is a digital currency that is underpinned by a kind of distributed ledger known as a “blockchain”. This ledger contains a record of all bitcoin transactions, arranged in sequential “blocks,” so that no user is allowed to spend any of their holdings twice.

The way that users detect tampering in practice is through hashes, long strings of numbers that serve as proof of work. Put a given set of data through a hash function (bitcoin uses SHA-256), and it will only ever generate one hash. Generating just any hash for a set of bitcoin transactions would be trivial for a modern computer, so in order to turn the process into “work,” the bitcoin network sets a certain level of “difficulty.” In short: Blockchains such as cryptocurrency networks require some way of achieving both consensus and security. PoW is one of this mechanisms, requiring nodes on the bitcoin network to provide evidence that they have expended computational power (i.e. work) in order to validate and confirm transactions as well as issue new bitcoins into circulation. This way they achieve consensus in a decentralized manner and prevent bad actors from overtaking the network.

Proof of stake (PoS): PoS is a consensus mechanism that randomly assigns the node that will mine or validate block transactions according to how many coins that node holds. The more tokens held in a wallet, the more mining power is effectively granted to it. While PoS is far less resource-intensive, it has several other flaws including a greater chance of a 51% attack in smaller altcoins and incentives to hoard tokens and not use them.

Proof of capacity (PoC): is a consensus mechanism algorithm used in blockchains that allows for mining devices in the network to use their available hard drive space to decide mining rights and validate transactions. This is in contrast to using the mining device’s computational power (as in the proof of work algorithm) or the miner’s stake in the cryptocurrencies (as in the proof of stake algorithm). Although it’s less energy intensive, widespread adoption of PoC could start an “arms race” to produce higher capacity hard drives and generate additional e-waste.

Source: https://www.investopedia.com/terms/p/proof-work.asp

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[1] Proof of work (PoW): Bitcoin is a digital currency that is underpinned by a kind of distributed ledger known as a “blockchain”. This ledger contains a record of all bitcoin transactions, arranged in sequential “blocks,” so that no user is allowed to spend any of their holdings twice.

The way that users detect tampering in practice is through hashes, long strings of numbers that serve as proof of work. Put a given set of data through a hash function (bitcoin uses SHA-256), and it will only ever generate one hash. Generating just any hash for a set of bitcoin transactions would be trivial for a modern computer, so in order to turn the process into “work,” the bitcoin network sets a certain level of “difficulty.” In short: Blockchains such as cryptocurrency networks require some way of achieving both consensus and security. PoW is one of this mechanisms, requiring nodes on the bitcoin network to provide evidence that they have expended computational power (i.e. work) in order to validate and confirm transactions as well as issue new bitcoins into circulation. This way they achieve consensus in a decentralized manner and prevent bad actors from overtaking the network.

Proof of stake (PoS): PoS is a consensus mechanism that randomly assigns the node that will mine or validate block transactions according to how many coins that node holds. The more tokens held in a wallet, the more mining power is effectively granted to it. While PoS is far less resource-intensive, it has several other flaws including a greater chance of a 51% attack in smaller altcoins and incentives to hoard tokens and not use them.

Proof of capacity (PoC): is a consensus mechanism algorithm used in blockchains that allows for mining devices in the network to use their available hard drive space to decide mining rights and validate transactions. This is in contrast to using the mining device’s computational power (as in the proof of work algorithm) or the miner’s stake in the cryptocurrencies (as in the proof of stake algorithm). Although it’s less energy intensive, widespread adoption of PoC could start an “arms race” to produce higher capacity hard drives and generate additional e-waste.

Source: https://www.investopedia.com/terms/p/proof-work.asp

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