In the digital era, cryptocurrencies such as Bitcoin have emerged as a new kind of investment opportunity. Unlike traditional currencies, cryptocurrencies don’t need to be backed by any government; instead, their value is determined by demand and the consensus algorithms used in producing them.
Bitcoin, the first and most popular cryptocurrency, functions off of blockchain technology, a secure and transparent digital ledger. Every transaction is recorded in a "block" that has a unique code, known as a hash, that links it to the previous block. This creates the chain of blocks that form the blockchain. Bitcoin mining, the process of creating new Bitcoins on the blockchain, requires incredibly powerful machines to run around the clock. This takes an immense amount of energy and has been linked not only to environmental concerns, but economic concerns for everyday Americans.
Regardless of the harm caused, Bitcoin’s methodology remains the most popular of all consensus algorithms. A big reason for this, aside from it being the first, is that it is widely considered the most secure. Other consensus algorithms, such as Proof of Stake, rely on people investing money into tokens on the chain that they wish to produce. Doing so creates a financial incentive to deter malicious activity by threatening to burn those tokens, meaning a loss of investment for the stakeholders. The big issue with Proof of Stake is that it’s more susceptible to bad actors who hold more wealth and are willing to lose their investment. With Bitcoin mining, powerful machines generate these tokens whenever they solve a puzzle. This leaves less power in the hands of an individual, making it more difficult to act in bad faith.
New methods are proposed and put to the test frequently, but one has yet to be found that has both the security of Bitcoin’s and the low environmental and economic impact of Proof of Stake. There is another kind of Proof of Stake, called Delegated Proof of Stake, where stakeholders vote on who should “produce” tokens of a given currency. By doing it this way, a producer’s reputation is on the line should they wish to maintain their position in the community.
In order to understand the real-world cost of cryptocurrencies like Bitcoin, one must understand its methodology, or “consensus algorithm,” called proof of work (PoW). Because a currency must be limited to have value, consensus algorithms such as PoW act as a useful barrier to slow the production of tokens. In the case of Bitcoin mining, machines are assigned the task of solving complex puzzles. When one is successfully solved, a Bitcoin is mined or created. Machines worldwide compete to solve these puzzles first and are thus incentivized not only to increase the power of their machinery but to have many machines working at the same time to increase their chance of success. These warehouses of machines are called mining farms.
In Texas alone, there are at least 27 mining farms, 10 of which are connected to the state’s power grid. According to a New York Times article, their overuse of resources has caused electricity bills to rise by nearly five percent or 1.8 billion dollars per year for ordinary residents. Worse still, during peak hours when the power grid is stretched thin, these mining companies are paid to turn off their machinery so that families and small businesses do not go without electricity. Mining companies have made millions of dollars just by turning off their machines when they are asked to. This money comes from the tax dollars of the same people whose bills are raised by the very existence of these farms.
One egregious example of this happened during the 2021 winter storm. At midnight, because the power grid was near failing, the grid operator ordered the mining company Bitdeer to turn off its machinery. In return, Bitdeer was paid $175,000 per hour, making a total of 18 million dollars throughout the aftermath of this storm. For most Texans, this storm was a threat to their security, a barrier to making money at one’s job. For mining companies, it was a payday.
The economic strain of Proof of Work alone is reason enough to question the worth of its high level of security and yet, the toll it takes on the environment is equally, if not more, egregious. Years ago, it was estimated that these farms use enough energy to power all of Ireland, but Bitcoin's negative environmental impact has grown rapidly over time. Carbon emissions per coin have multiplied 126 times from 2016 to 2021 and continue to grow today as cryptocurrencies grow more popular, with almost zero oversight in managing these emissions.
Due to the decentralized nature of cryptocurrencies, most governments don’t know what to do with them or how to regulate them. Roughly 60% of mining farms for Bitcoin are in China, while the United States houses 16% with more scattered across the globe. Regulating a currency and its production when it operates and gains value completely separate from any world government is nearly impossible. The best that a country can do is put regulations in place to limit emissions, but most mining farms are strategically located where the cost of power is both more affordable and where such regulations are unlikely to be put in place. While the SEC is starting to make efforts to regulate this industry, it has yet to find an effective way to do so.
While cryptocurrencies such as bitcoin are exciting enterprises that are paving the way for the future of finance, we need to be cognizant of the sustainability of these new technologies, both economically and environmentally, as we go forward. There are many consensus algorithms that place a lesser burden on society, and the industry continues to propose and implement new solutions on different chains for the cryptosphere. Moving forward into this new era of digital currencies, it’s important to be mindful of the greater impact your investments make and the good or harm that it does for society at large.
SOURCES
https://www.nytimes.com/2023/04/09/business/bitcoin-mining-electricity-pollution.html
https://dergipark.org.tr/en/pub/atauniiibd/issue/43125/423056
https://pubs.acs.org/doi/full/10.1021/acs.est.9b05687