Confused about why there are environmental concerns about cryptocurrencies? We’re laying it out below. We are going to seriously oversimplify some processes in this explainer today to make this as accessible as possible. These are complex concepts explained in minimal words — keep that in mind while reading.
What does ‘mining’ cryptocurrency mean?
There are two aspects to mining. The first part of mining is the process where a new supply of cryptocurrency (like Bitcoin) is created and enters circulation. The second process is the verification of transactions conducted with the cryptocurrency.
For those processes to occur, incredibly difficult mathematical equations need to be solved, and only certain types of high powered specialised computers can solve these complex problems. The mathematical problems are so difficult, they cannot be solved by hand and even those high powered computers are challenged as they become more and more difficult over time.
‘Miners’ perform the mining process. They are people (generally big groups of people) who run thousands of high powered computers trying to solve the equations. The first person or group of people to solve the equation, get rewarded for their work and receive newly created cryptocurrency without having to put money into it — but they ‘paid’ for it with their electricity and expensive high powered computers.
Right, keep all that information in mind. Let’s take a look at some arguments:
Why do people say cryptocurrencies are bad for the environment?
Remember those high powered computers? For those to run, a lot of electricity is required — like a lot. When people argue about the environmental impact of cryptocurrency, they are actually referring to the mining process and the electricity needed for mining. Benjamin Jones, a professor of economics at the University of New Mexico said that the electricity required to power Bitcoin mining “has historically been more than [electricity used by] entire countries, like Ireland”.
Environmentalists argue that miners typically reside in places where electricity is cheap, meaning that the power has a higher chance of being coal. Again, using the example of Bitcoin, the Cambridge Bitcoin Electricity Consumption Index estimates that 65.8% of Bitcoin mining occurs in China. Around two-thirds of China’s electricity comes from coal. As Bitcoin and cryptocurrencies are typically unregulated, there is no definite way to know exactly where miners are situated, and what type of electricity they are using.
On the other side, why do people call the impacts a myth?
Those in favour of cryptocurrency talk about how Bitcoin (and other cryptocurrencies) are being increasingly mined with electricity from renewable sources, or with energy that would typically be wasted. Those in favour also argue that Bitcoin and other cryptocurrencies use less energy compared to a traditional banking system. A study by ARK Investment Management found the Bitcoin ecosystem consumes less than 10% of the energy required for the traditional banking system.
There are also other cryptocurrencies that are working towards becoming greener. Ethereum, another cryptocurrency, has a centralised group of developers who are looking to shift its model away from using high powered computers to solve equations, to significantly decrease the required energy consumption to secure the cryptocurrency. It would be much harder for Bitcoin to do this though, as it does not have a centralised company overseeing it (we don’t actually know who is the creator of Bitcoin). Although, many hardcore Bitcoiners do not want Bitcoin to follow Ethereum’s transition and see the energy-intensive model as a core part of the value of Bitcoin.
Then there are smaller cryptocurrencies like Nano that brands themselves as an eco-friendly currency that only requires a standard consumer device for a transaction. Chia and Cardano are also examples of cryptocurrencies whose models do not require near the energy that Bitcoin does.