Response to Musk: Will Bitcoin’s Environmental Unfriendliness be its Downfall?

Recently, Bitcoin’s electricity usage and impact on climate change, which stems from its proof of work algorithm, has been called into question by environmentalists and big names such as Elon Musk. Fortunately, this problem will not be the death knell of Bitcoin, and the forces of economics should correct this issue before too much damage is done.

On May 12, at 5pm EDT, Elon Musk released a tweet stating that Telsa will not move their Bitcoin until it is more environmentally friendly, and that they are looking for alternative cryptocurrencies that do not have such an adverse impact on the environment. Almost immediately, the market reacted irrationally, and the total market capitalization of cryptocurrencies dropped by nearly 10% in a matter of hours. The fact that one person has this much control over a $2 trillion dollar market is an issue to discuss another time, but he does bring up an important point about the proof of work algorithm and Bitcoin’s future in a world concerned about climate change and sustainability.

Bitcoin uses proof of work as its consensus method. What this means is that people from around the world use computing power in order to confirm transactions on the Bitcoin blockchain, and receive BTC as a reward for their efforts. Naturally, all of this computing power uses a significant amount of electricity. In fact, one Bitcoin transaction takes as much energy as it takes to power 20 United States homes for a day, according to some sources. The total amount of energy used by Bitcoin is estimated to be around 0.55% of worldwide electricity usage. This is an incredibly high amount of energy consumption, and some argue that it is not worth the cost. Even more worrisome is that some of this energy comes from coal and other fossil fuels, which release lots of pollutants into the atmosphere. If this level of pollution keeps up, and Bitcoin continues to grow, this could mean that there is a copious amount of pollution coming directly from Bitcoin, which would make it difficult for investors and governments alike to get behind the currency.

Fortunately, there are solutions for Bitcoin that will mitigate this risk to worldwide adoption. First, there are the economic incentives in place for miners to use alternate sources of energy. Like any rational actor, cryptocurrency miners want to minimize cost and maximize profits. Luckily for the environment, some of the cheapest sources of energy are renewable, such as hydroelectric and geothermal energy. This is why a large portion of miners are situated in China’s Yunnan and Suchan provinces, where there is ample hydroelectric power. Over the coming years, as more governments condemn coal usage and offer more opportunities for renewable sources of electricities, more miners will begin moving to the places offering these resources and taking advantage of the lower prices, which will raise their profits.

It must be conceded that presently, coal is an extremely cheap energy resource, and as a result it is being used by a lot of miners. This is a real issue with Bitcoin, and the only way for it to go away is with government intervention, which seems to be happening slowly but surely around the world. In fact, China’s Inner Mongolian region, where a lot of coal-based mining takes place, is planning to ban cryptocurrency mining in order to cut down on energy consumption. Examples like this show that governments are moving in the right direction.

Another solution to Bitcoin’s electricity problem would be to move to proof of stake. Unlike the energy-intensive proof of work mining process, proof of stake simply involves people using their Bitcoins as collateral in order to secure the network. For example, let’s say Bob stakes 1 Bitcoin for the proof of stake method. Now, instead of his computer completing complicated math problems to solve transactions, it simply looks at them and confirms whether or not they are valid. If Bob says a transaction is valid when the rest of the network doesn’t, his 1 Bitcoin will never be returned to him, so he is incentivized to act honestly.

It is possible that Bitcoin moves to this model through an upgrade to the network, but it is fairly unlikely, because Bitcoin miners would never agree to make their business model obsolete.

Instead, Tesla and others could move to a more environmentally friendly blockchain, such as Ethereum after their proof of stake upgrade, which is estimated to be released in 2022. Another option would be Algorand, an Ethereum competitor, which pledges to be one of the world’s first carbon negative blockchains. As ethical investing continues to become more popular, blockchains like Algorand can expect to have a significant advantage in attracting investors and making themselves appealing to governments.

Even though Elon Musk’s tweet brings up an important conversation that needs to be had in the cryptocurrency space, it is not an issue that cannot be fixed. Through the diligent efforts of governments and environmentally-conscious individuals, the problems of Bitcoin’s electricity consumption can be dealt with through natural economic forces and incentives.

By Lincoln Murr