The environmental ethics of investing in cryptocurrency are too hard to ignore
Happy 2022! Make it amazing.
Welcome to the first Byte Size post of the year.
Spend time talking to cryptocurrency zealots and you might hear that they are part of a movement to change the world. They may say that they are the vanguard of a movement to take on the traditional banking system, leading the shift from fiat currency to a brighter decentralised future.
You are unlikely to hear about how Bitcoin has a carbon footprint equivalent to Kuwait, or that a single Bitcoin transaction has an equivalent carbon footprint to watching 180,000 hours of Youtube. It has small electronic waste (ie the hardware) equivalent to the Netherlands. Ethereum has a carbon footprint equivalent to Hungary.
Though Bitcoin and Ethereum aren't the only culprits, they are the largest cryptocurrencies, and most tracked. It's the currencies that use proof-of-work algorithms that are environmentally problematic as they rely on significant amounts of energy to mine coins.
Whether crypto enthusiasts are right or wrong about the future of decentralised finance doesn't matter much for this post. What is deeply concerning is how a predominantly speculative investment, which is barely transacted for goods and services, is compromising climate initiatives.
Cryptomining is energy-intensive, and environmental damage is literally incentivised
Cryptocurrency mining is a power-hungry endeavour. Mining involves solving complex equations to create new coins. More computing power = more equations solved = more coins. It's a bit more complex than that, but that's the gist.
Bitcoin and Ethereum become more difficult to find as more coins are mined, so the amount of computing power required increases. They rely on proof-of-work algorithms that require miners to expend effort (ie computing power) to solve equations and be awarded currency. This is why it's so energy-intensive.
As of the time of writing, Ethereum is moving towards a more sustainable proof-of-stake algorithm in which an entity is chosen algorithmically to verify transactions based on their stake in the network.
As the coins get rarer, the price rises with buyers speculating that the future value will be greater than it is today - further incentivising greater computing power and energy consumption to mine coins. It's a horrible incentive mechanism from an environmental perspective.
Mining is so energy-intensive it threatens to reverse carbon reduction gains from transition to electric vehicles and reduction in fossil fuels. Bitcoin's energy consumption is equivalent it Thailand. Ethereum's is comparable to Kazakhstan.
Theoretically, if all energy was renewable, or mining occurred at times power grids weren't under pressure, there wouldn't be much of an issue. Unfortunately, that's not the case with mining occurring regardless of the time of day or level of renewables. For example, a significant amount of mining occurs in Kazakhstan which relies on fossil fuels.
Investment in cryptocurrency is mostly speculative, and it isn't useful enough to justify the environmental cost
The cost to the environment of cryptocurrency isn't automatically a bad thing. It depends on how much value cryptocurrency offers - and there is definitely value. Cryptocurrency is secure, easy to transact and private.
But this doesn't outweigh the downsides and environmental costs.
It is surprisingly easy to lose currency - and not just to hacks, but 'accidents' (ie typing the wrong address) while transacting.
Bitcoin is only accepted as legal tender in El Salvador. Many other countries such as the USA allow Bitcoin to be used, but it is rarely transacted for goods and services. Ethereum hasn't even got that far.
Investment in cryptocurrencies is mostly speculative, assuming the currency will offer significant value in the future. This somehow makes the environmental damage worse as many investors see little value today - it's mostly about the future value, which may or may not be realised. It seems frivolous.
If cryptocurrency offered significant functional value there might be greater justification for the costs - but right now there isn't much to shout about. To be clear - there is value in blockchain, but that is different to cryptocurrency, which is a medium of exchange enabled by a blockchain.
Where is the intervention?
It is promising to see that many new cryptocurrencies are not reliant on proof-of-work algorithms, and have lower energy costs. But that still leaves the problem of what to do to manage the environmental costs of cryptocurrencies that rely on proof-of-work algorithms and will be around for some time.
Government intervention to address the environmental cost is sorely needed but has been slow. There are various options available such as carbon taxes or reporting requirements. For example, regulators could levy carbon taxes on Bitcoin miners.
It would be nice if the industry could self-regulate, but the environmental costs are too high and there isn't time with many countries struggling to meet carbon-reduction objectives as it is.
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