‘Bit of a hazard’
Bitcoin is the signature crypto asset, hence, reading a report last week that a UN-affiliated agency has cautioned that its water and energy usage, during the mining process, posed significant environmental risks got me thinking.
Last week, africabriefing.com, a London based news portal, reported that “a recently released United Nations affiliated report has sounded the alarm on the environmental toll of Bitcoin’s proliferation.
The report, spanning analysis across 76 nations, sheds light on the distressing impact on essential resources, such as energy, water, and the environment”. According to Dr Kaveh Madani, director of the United Nations University Institute for Water, Environment, and Health (UNU-INWEH), “Technological innovations, including Bitcoin, come with unintended consequences….[and that] our findings reveal shocking revelations”.
So what exactly is the concern here? Three things, really—water, energy and the environment. But to understand it better, let us first look at the issue of Bitcoin mining within the crypto ecosystem.
In context, “Bitcoin mining” is used to refer to the method of verifying the transactions on the blockchain and generating new Bitcoin. This is just like a central bank printing new fiat currency. I hope you noticed the word “blockchain”.
Well, this is decentralised record-keeping through what is known as a distributed ledger. It is necessary to ensure that within the “block”, there is no double-spending problem.
This ledger can be regarded as a file, like the Microsoft Excel worksheet that we use, and its function is to record the history of all subsequent transactions, following an initial distribution of cryptocurrency. In fact, an up-to-date copy of the entire ledger is stored by each user, hence its “distributed” nature.
The Bitcoin mining process, which is a very complex technological process, involves the validation of bitcoin transactions over the Bitcoin network. It is like a process of validating a block on the chain network and getting paid in Bitcoin.
And the people who are involved in this process of mining are known as miners. It is called “mining”, because just like any other form of natural resources, there is a finite number of Bitcoins available. And just like real mining, in Bitcoin mining, one needs to invest energy in order to generate or create Bitcoins.
And here, the energy is in the form of electrical energy to mine Bitcoins. Significantly, the miners compete against each other to solve complex hash puzzles, encoded cryptographically, to verify the blocks containing transactions.
Experts say to become an effective miner and compete favourably, you need a setup of a powerful hardware, mining software and e-wallet, mining pool (or solo mining) and strong energy supply. These are the processes that have generated strong concerns because of their impact on environmental sustainability.
The report, “The Hidden Environmental Cost of Cryptocurrency: How Bitcoin Mining Impacts Climate, Water and Land”, “released on October 24, offers the first multi-attribute estimation of the environmental footprint of the global Bitcoin mining network, including its carbon, water, and land footprints.
It also emphasised the need for immediate policy interventions to monitor, regulate, and mitigate the environmental consequences of digital currencies “which play an undeniable and growing role in the global financial system”.
“The results show that the global BTC [Bitcoin] mining network’s electricity consumption is substantial. Price of BTC plays a crucial role in mining profitability, with higher prices driving increased mining activity and energy consumption at the global level.
A 400 per cent rise in the BTC price from 2020 to 2021, was followed by a 140 per cent surge in the worldwide BTC network’s electricity use. In the 2020-2021 period, the global BTC mining network devoured 173 terawatt-hours (TWh) of electricity, marking a 60 per cent increase from the 2018-2019 period. Projections for 2023 suggest that electricity consumption can exceed 135 TWh”.
In fact, “to provide context, if BTC were considered a country, its electricity consumption in July 2023 would rank 27th globally, outpacing populous nations such as Pakistan”.
These concerns aside, Bitcoin presents other hazards too. As explained in the August 20, 2022 edition of this column, the volatile nature of the asset has been destabilising to many. Between November 2021 to August 2022 for example, Bitcoin lost more than 70 per cent in value. As a signature cryptoasset, its losses and instability in the crypto market always exacerbated problems in the industry. The truth is, within the crypto ecosystem, there is widespread collapse of crypto assets, some of which I have reported in previous editions of this column.
This calls for caution though, doesn’t it? “Understandably, a number of high-profile firms have failed to live up to expectations in the crypto market- because of the market turbulence and greed-, just as we have also experienced corporate failures of great magnitude in the “traditional” businesses that we are used”, is what l wrote in the August 20, 2022 edition of this column.
“In fact, crypto assets enthusiasts have always argued that their technological design enables them to function as a hedge against economic volatility and inflation. Some call it ‘digital gold’, in reference to the mining concept of these assets. But as l have explained in this column time without number, these assets are highly risky and prone to speculation because they have no real economic assets backing them. Yes, forget about stablecoins too. The evidence is clear”.
The real intrinsic value of crypto assets is still a subject of considerable academic debate, and that marks out these assets as truly uncertain. What l mean by this statement is that one would expect asset classes of this nature, with the hype, to rather enjoy considerable positive debate among market participants and other stakeholders.
But with the crypto assets, whereas there are some discussions about their value by those mining the nuggets (pumping) its uncertain nature is what dominates discussions among policymakers, governments and other academics with interest in the subject.