Bitcoin uses more electricity per annum than the Netherlands, UAE, and over double the consumption of Singapore. From data published this month by Cambridge University researchers, Bitcoin consumes around 120.37 GWh per year, which is equivalent to roughly 0.5% of the world’s energy consumption. Bitcoin’s consumption of electricity places it as the 32nd largest energy consumer worldwide, compared to the annual electricity consumption by countries worldwide in 2018. With the potential volatility of Bitcoin in the coming future, the theoretical upper bound for its energy consumption in 2021 is placed at 270.61 GWh per annum, which would place it as the 15th biggest consumer worldwide.
Bitcoin’s huge energy consumption is attributed to the upkeep of its cybersecurity, double spend protection, and augmentation. It is controlled by a network of purpose-built computers, which solve complex maths problems to allow transactions to go through. The augmentation of Bitcoin works under a design known as proof of work, which is where computers, known as ‘miners’, mine these complex problems using the Hashcash function and verify the validity by decentralised nodes on the Bitcoin network. Hashcash function is a method of generating an output of a fixed length from a string of text of any length using a mathematical function. Typically, these “miners” have to use shear force and trial and error to determine the original input values after they have been hashed. The proof of work method consumes the most energy compared to other methods such as proof of stake, but these methods cannot replicate the desirable functions of proof of work.
Cardano, which is the 4th biggest cryptocurrency by market cap, consumes 6 GWh of electricity using proof of stake. Cardano’s total consumption is only 5% of the total energy consumption of Bitcoin. Each Bitcoin transaction uses the same amount of electricity as 436,000 transitions through the Visa payment system. The countries where most of the Bitcoin’s transactions and augmentation occur are in Iran, China, and Kazakhstan. In these countries, there is a large percentage of electricity produced using fossil fuels such as coal. Therefore, Bitcoins also have a large carbon footprint. It is estimated that each transaction of Bitcoin has a carbon footprint of 305kg of CO2 or 36.95 Mt CO2 per annum, which is comparable to that of New Zealand.
Since 2009, when the first transaction of Bitcoin occurred, it was known that Bitcoin transactions had a large carbon footprint. This knowledge has not stopped corporations, such as Tesla Inc, from investing billions of dollars into the cryptocurrency and including them on their balance sheets. Telsa Inc announced their investment of 1.5 billion USD of its reserves into Bitcoin in early February. The company later announced that they are accepting payments using Bitcoins for their electric cars. Mastercard followed this by announcing that they would allow merchants to accept cryptocurrency as a form payment and PayPal’s Venmo followed suit.
There has been criticism by ESG-minded investors regarding companies’ investment in cryptocurrency. They believe that there should be more considerations of the company’s indirect emissions when calculating its ESG rating and its inclusion in green portfolios. ESG-minded shareholders of Tesla are questioning the governance of Tesla. They believe that this investment goes against the environmental values of the company. Tesla Inc. still has an ‘A’ ESG rating from the index compiler Morgan Stanley Capital International (MSCI) and remains on many green portfolios. Tesla Inc. also did not disclose their indirect emissions in its most recent annual report, which many shareholders believe should be included in future annual reports.
The rise of Bitcoin has only begun and will likely continue to increase in the long term. J.P. Morgan predicted the price of Bitcoin could rise to over 146,000 USD in the long term. The optimism of institutional investors will likely give stimulus to Bitcoin and other cryptocurrencies over the coming years. As Bitcoin becomes more widely used, more people will need to connect their computers to the Bitcoin network. The increase in network size will cause more electricity consumption as there will be a larger volume of Bitcoin transactions. The hot spots of the network will likely negatively affect countries’ attempts to try and reach their net-zero goal because of the increased mining of Bitcoins in their countries. As Bitcoin is designed to be a decentralised system, there is no body to be accountable for the carbon footprint or energy consumption attributed to Bitcoin transactions. For considerate consumptions to occur, companies and individuals will need to be accountable for the carbon footprint and energy consumptions. If the volume of Bitcoin transactions isn’t controlled or reduced, the electricity consumption will only increase and its carbon footprint with it.
By James Watson-Gandy
Sector Head: Sophia Li