Recently, there has been a huge debate surrounding the environmental effects of Bitcoin. Specifically, the debate centers around the verification used. Bitcoin currently operates on proof of work (PoW) consensus, meaning individual miners can use their computing power to verify transactions. However, the computing power requires high amounts of energy, sparking a debate surrounding the current system.
Overview of Bitcoin
Bitcoin is the most traded cryptocurrency, with an average volume of over $32 billion. A majority of the hype surrounding cryptocurrency was started with Bitcoin, as it saw astronomical increases in price in the past several years and paved the way for newer crypto technology. It was created by the alias of Satoshi Nakamoto in 2008, but the true identity of its creator is unknown. Bitcoin works using a peer-to-peer network, meaning transactions are given directly to one another through a decentralized network. The $32 billion of transactions need a way to be verified. Currently, Bitcoin relies on a PoW mining system of verification.
Cryptocurrency Mining Explained
Mining on a proof of work blockchain is a system used to come to consensus on what transactions are legitimate. PoW relies on the computing power of a global network of miners to verify transactions. Miners can contribute computing power to the blockchain and gain rewards for doing so. Transactions are verified through a transaction hash that requires computing power to complete. A “block” is uploaded to Bitcoin’s blockchain every 10 minutes, and the miners that verify the transaction will receive Bitcoin for compensation . This is called the block reward. All transactions are placed into a list that cannot be retrospectively edited. Only new blocks can be added to the list. Essentially, anyone with the necessary resources can contribute to the computing power of the blockchain and gain rewards for verifying transactions.
How Much Energy Does Bitcoin Use?
While cryptocurrency mining is profitable, it has drawbacks.The most prominent is the energy usage. Bitcoin miners collectively use 81.51 terawatt hours (TWh) per year. This amount of energy is higher than all of Austria combined, and 39th among all countries. There is a mining farm in Iceland that uses more energy than the entire country. I have a small-scale mining rig, and it uses 600 watts, 24/7. This is more than a majority of large appliances. Indeed, the energy consumption of Bitcoin is unfathomably high, all for the verification of transactions on the blockchain.
Why Bitcoin May Not be Bad for The Environment
While Bitcoin uses lots of energy, it does have benefits. Since buying energy directly can be very expensive, many large-scale mining operations are beginning to utilize solar power and other forms of renewable energy. Renewable energy is cheaper for miners in the long run and allows for an increase in profits.
This incentivises renewable energy, limiting the environmental impacts of mining. As more people begin mining, many are searching for ways to maximize profits. Through solar and other forms of renewable energy, profits are able to be maximized. Due to the competitive nature of mining, renewable energies are becoming a more popular option. This will greatly subdue the negative impacts Bitcoin mining can have on the environment.
China’s Cryptocurrency Ban
In late September 2021, China reiterated the enforcement of a ban on all cryptocurrency transactions. This came after a long debate surrounding the legitimacy of crypto in China. Chinese officials ruled that it promoted fraud, gambling and other criminal activities. This ruling meant that miners would have to leave the country and make new farms to continue mining and avoid prosecution.
On such short notice, miners will be unable to utilize renewable energy as much as some may like. Miners do not have time to wait for solar panels to be installed; they will simply plug into the easiest form of energy and begin mining. This means more miners will move towards traditional sources of energy, a major drawback for those hoping to reduce the environmental impacts of Bitcoin. This is obviously not the most efficient outcome.
Proof of Stake: A Solution
Ethereum, the second largest crypto, is in the process of converting from a PoW system to a proof of stake (PoS) system. PoS does not rely on computing power and energy to verify transactions. Instead, it uses holders of the token to verify transactions. This process is known as staking. The energy requirements and environmental impacts are virtually nothing in comparison to the PoW system. While there have been rumors of Bitcoin adopting a PoS system, there is no concrete evidence that it will happen anytime soon. Additionally, nearly every new token uses a PoS system, suggesting that PoW consensus may be antiquated technology. Indeed, Bitcoin is lagging behind its more modern and eco-conscious competitors.
Elon Musk, Tesla & Bitcoin
Recently, crypto enthusiast and Tesla CEO Elon Musk declared that Tesla would no longer accept Bitcoin as a form of payment until at least 50% of the computing power used for Bitcoin mining came from renewable energy. Musk cited the environmental concerns for the decision. This is yet another incentive for miners to move towards renewable energy. Musk has proven to have a huge impact on crypto markets, sending tokens such as Dogecoin (DOGE) skyrocketing. Anything Musk says about crypto is listened to by millions. In this instance, he is using his influence to help reduce the consequences of Bitcoin mining.
Is Bitcoin Still a Good Investment, Anyway?
Bitcoin is a pioneer in the crypto sphere, but is becoming outdated in comparison to its newer competitors. New projects like Cardano (ADA) are more focused on environmental concerns, hoping to improve upon Bitcoin’s foundation. However, if Bitcoin can adapt to a new wave of crypto, it may very well retain its place as king of the crypto world. If you wish to purchase Bitcoin, doing so is very easy. It is the most widely offered currency and is available on both Coinbase and Robinhood.
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