The Real Truth Behind Bitcoin’s Sustainability Issues

On May 13th, 2021, Elon Musk drove down the value of Bitcoin by almost $360M with one tweet which said Tesla would officially suspend vehicle purchases using Bitcoin due to its high energy consumption during the mining process. This along with China’s ban on Bitcoin mining eroded Bitcoin sentiments heavily to the point that it set off a long bearish period for not only Bitcoin but for crypto in general. Although, a positive impact was that it led to the formation of the BMC (Blockchain Mining Council) in May 2021 which plays a big role in positively scrutinizing the environmental impact of Bitcoin.

It is an understatement to say that Bitcoin has attracted huge media attention over this “hot” issue. Misinformation, false narratives, and exaggerated statements are the few articles that come into play when talking about Bitcoin. Because let's face it, Bitcoin and its underlying processes are really hard to understand. So can Bitcoin’s so-called ‘heavy’ energy consumption be justifiable? Let’s break it down:

Bitcoin mining and the reason behind its heavy energy consumption

Bitcoin works on a blockchain algorithm called Proof-of-Work (PoW). In PoW, miners get rewards after competing with each other to complete transactions on the network. The problem here is that this process is energy demanding. Similar to a lottery, when more miners join the network, the difficulty of the puzzle which is required to be solved to add a block increases. This keeps the whole system in check, so as to not alter the frequency of adding blocks, which is at present 1 Bitcoin block every 10 minutes.

Mining Bitcoin is incredibly difficult and takes up a lot of computational power. This only increases when more miners join the network. There is a direct correlation between Bitcoin demand and energy use which is why the electricity consumption of bitcoin increased by about 126% in late February when Bitcoin price hit new highs.

On the other hand, Bitcoin is one of the most secure public networks created, due to the point of the work process. However, it's hard to justify its carbon footprint, without taking steps to decrease it in the short run.

Is Bitcoin affecting our environment as badly as we make it out to be?

Bitcoin consumes more energy than a country like Sri Lanka, Switzerland, or the United Arab Emirates according to an index created by the University of Cambridge.

The above facts and figures are enough to raise the alarm for anybody to promptly develop a negative opinion of Bitcoin. Comparing it to a country or another industry shifts the narrative and takes the whole thing out of scale. “Bitcoin consumes the same amount of energy as a small country”. The fact is that any major industry will consume more power than a small country.

The underlying problem is that we consider any kind of energy consumption akin to doing something wrong. We must however note that Bitcoin’s energy consumption is not equal to its carbon emission which is a different matter. The process behind calculating Bitcoin’s energy consumption is a pretty straightforward process which is why there are many figures based on this. If Bitcoin sources its energy well, it will have a better environmental impact; compared to another industry that consumes the same amount of energy, but derives it from sources that have a heavy carbon footprint

Recently, the BMC published findings saying that Bitcoin has a sustainable power mix of about 56%, which makes Bitcoin mining one of the most sustainable industries in the world. To gain some perspective, the US has an electricity consumption that is only 30.5% sustainable, and China, less than 15%.

Bitcoin’s way forward with sustainability

Any industry which wants to have a sustainable future needs to take sustainability seriously. Bitcoin survives on the sentiments of institutional investors and the backing of companies that have started to take ESG (environmental, social, and corporate governance) seriously. This is exactly why Tesla claimed to stop using Bitcoin for payments; as a “green” company it wouldn’t do them any good to dirty their hands with something that looks to be unsustainable.

The Miners Paradox

Bitcoin miners take the brunt of the sustainability issue and are portrayed as the bad guys who don’t really care about the environment. The irony is Bitcoin has been continuously trying to become more sustainable without any external pressure.

As the cost of power is the major cost in the Bitcoin mining process, they are automatically incentivized to shift to cheaper renewable sources and use more efficient mining equipment. Bitcoin enthusiasts like Micheal Saylor claim that the highest marginal utility of electricity is for Bitcoin. In a world where about 30% of the power produced gets wasted, using that extra power at least gives it a value. Bitcoin miners themselves only operate in places that have excess power which is mostly lowly populated land that can afford to easily spend their extra electricity on the Bitcoin mining process.

Bitcoin miners have slowly started to shift out of places like China where they mostly use coal for power; to places like North America where renewable energy for the mining process is given priority. Geopolitics plays a role here and although they're motivated to operate in a place where the political climate offers them benefits; they benefit the whole ecosystem themselves by improving technical and engineering capital in that place.

Cryptocurrencies that are “greener”

Cardano(ADA) is a cryptocurrency that actually received increased attention after this fiasco, as a sustainable alternative. It relies on the Point of Stake mechanism where participants buy tokens to join the network.

Many new cryptocurrencies have tried to jump on the bandwagon and gain a competitive advantage by using PoS, hence there are many environmentally friendly options available. A technologically advanced innovation is SolarCoin, which aims to reward solar power installations by giving coins as a reward for producing solar energy. Ethereum has also slowly started to adopt the point of stake consensus mechanism which may reduce energy consumption by as much as 99 percent.

Critics point out that Bitcoin should move to this point of stake model which consumes significantly lesser energy as compared to PoW.  However, the process is tougher and expensive than it sounds. Besides, it’s the point of work model that gives Bitcoin the tight security for its network.

Conclusion

Bitcoin’s sustainability issues are both a huge problem and a big opportunity. Going forward, the next few steps will be very crucial as the media, critics, Musk, and politicians are going to be very nitpicky upon any changes that are made.

Satoshi has created Bitcoin in such a way that there can only be 21 million coins in circulation. In a few years, more than 90% of the coins would have already been mined. This sets a natural progression, where automatically the amount of energy consumed decreases. The incentive of the network to use electricity exponentially falls and it will start to rely more on fees transacted between the miners.

Years down the line, the thought of a decentralized network with highly advanced and efficient technology, operating with marginal costs sounds very attractive. With Bitcoin, this could be a reality.

If you fancy your portfolio to be in the green in the future, maybe buying the dip would be a good option before Bitcoin becomes majorly green.