The Sustainability of Cryptocurrencies
We look at the environmental impact of cryptocurrencies and whether there is a sustainable way to invest in them.
Written by Victoria Kent, Senior Investment Specialist
Photo by Baldvin Baittrok @baldvinka
This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
How sustainable are cryptocurrencies?
It's hard to keep up with Tesla's stance on Bitcoin – good thing CEO Elon Musk keeps the world updated via tweets. In February 2021, Tesla revealed it had bought $1.5bn of bitcoin and would accept it as a payment method.
Two months later, they reversed their position with Musk tweeting that cryptocurrency could "not come at a great cost to the environment".
The company then gave everyone whiplash with a subsequent announcement stating Tesla would resume accepting Bitcoin when there’s confirmation of reasonable (~50%) clean energy usage by [bitcoin] miners.
Like many of Musk's market-moving tweets, the news sent the price of bitcoin soaring back over US$40,000.
The question you are probably asking is: what has Bitcoin, a crypto asset, got to do with the environment?
How can one digital currency have a carbon footprint large enough to make Tesla remove it as a payment method?
And why all the flip flopping? How can it be so controversial?
Energy efficiency of inherent computational process
In a nutshell, Bitcoin's carbon intensity stems from how it’s calculated. Bitcoin relies on a ‘proof of work’ (PoW) system that involves a huge amount of calculations (and, thus, processing power) to produce a single token. You may have heard this described as "mining".
Other cryptocurrencies use a ‘proof of storage’ or ‘proof of stake’ (PoS) system instead, which consume far less energy. Block lattice is an example of another energy-efficient technology, which doesn’t require mining.
Even Elon Musk's favourite Dogecoin is more energy efficient than a pure PoW protocol such as Bitcoin’s SHA-256 mining algorithm, but not as energy efficient as a proof of storage protocol or similar.
Volume and price matter
One cannot ignore the importance of market dynamics when it comes to the energy consumption of cryptocurrencies. Many, much smaller cryptocurrencies, naturally have a far lower carbon footprint, since they incur far fewer daily transactions compared to Bitcoin.
Market price slides and crashes can also affect energy consumption, as it can lead to miners slowing down or turning off their devices – it’s not profitable to run the machines at certain prices.
When it comes to the sustainability of cryptocurrencies, energy efficiency is just one part of the equation. It’s also important to consider whether the currency itself supports environmental initiatives, is involved in carbon offsetting or reductions, or other environmentally-conscious endeavours.
Examples of 'greener' cryptocurrencies
SolarCoin
A novel approach to cryptocurrency, they create 1 SolarCoin for every megawatt hour generated from solar technology.
BitGreen
Founded in response to the environmental impact of Bitcoin, it’s a community-driven initiative using a low-energy proof of stake algorithm. Linked to BitGreen Foundation – a non-profit overseeing the maintenance of the BitGreen project.
Looking beyond energy efficiency, how else can cryptocurrencies demonstrate sustainability? Let’s explore this via the technology behind crypto – blockchain.
The power of blockchain
Blockchain technology has tremendous potential to tackle the Sustainable Development Goals (SDG). It can help:
support financial inclusion
improve aid effectiveness
power supply chain transparency to enable consumers to consume and produce responsibly, and
provide legal identity for those without it.
The ability for blockchain to act as an immutable ledger (one that can't be changed) is beneficial to those who can’t access facilities that register property ownership, or where those facilities have been destroyed in a natural disaster.
In a crisis or extreme poverty situation, moving away from danger and accessing aid, healthcare, and legal protection is extremely difficult without proof of identity.
Blockchain can assist ID-less people such as refugees or migrants in transit, and make receiving aid more efficient and dignified. It creates a universal and irrefutable digital identity, enabling people access to essential and potentially life-saving services around the world.
Despite the potential for blockchain to be used for good, it is the most marginalized, poor, rural populations, and the displaced who are the least likely to have access to reliable internet connections.
Read about the many blockchain-powered SDG projects here.