If you have been following cryptocurrencies, you must have noticed the massive growth in their value over the past couple of years. However, many do not know about the enormous amount of energy these cryptocurrencies need.
Cryptocurrencies: what are they?
Cryptocurrencies are digital/virtual currencies secured by coded mathematical messages called cryptographs. Cryptocurrencies work via blockchain technology, a decentralised network of computers that records and manages transactions as blocks. The computers in the network strive to solve complex mathematical problems to win the right to record a transaction and create a block. Computers that successfully solve problems are rewarded with cryptocurrency. This process, known as mining, is how cryptocurrencies are added to circulation, and it is akin to a central bank printing more money.
Bitcoin mining is performed by high-powered computers that solve complex computational mathematical problems. These problems take about 10 minutes to solve, after which the solving computer is awarded some bitcoins, and another problem is put forward, and the cycle starts again. Although the time taken to solve these problems are constant, the computational power required increase as many more people decide to enter the network to mine the currency.
Mining is an energy-intensive process, as many high-powered computers compete to solve problems and be rewarded with bitcoin. Often, the computers used for mining were not designed for that purpose leading to higher energy use. In recent years, miners have adopted computers designed specifically for efficient cryptocurrency mining, called Application-Specific Integrated Circuits (ASIC).
Energy Consumption
The continuous cycle incentivises global Bitcoin mining. Mining provides a steady income stream, and as the price of Bitcoin increases, more people are purchasing energy-intensive mining equipment to enter the network. This has caused rapid growth in the total energy consumed by the Bitcoin network. The entire Bitcoin network now consumes more energy than several countries. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin consumes an estimated 136.33TWh annually. For context, if Bitcoin were a country, it would be the 27th largest energy consumer globally.
Bitcoin miners require a constant flow of energy as ASIC miners, once turned on, cannot be switched off until there is a breakdown or it is unable to mine Bitcoin at a profit; as a result, Bitcoin requires a constant energy source. Since renewable energy sources are intermittent, Bitcoin miners increase baseload demand for grid power. Baseload demand is often made up of fossil fuel generation sources. A majority of the global mining facilities are located primarily in China, especially in regions where coal-based energy is utilised either directly or as a baseload power source.
What the Future Holds
Bitcoin price has grown 741 per cent over the past 12 months to $56,911.60 (as of March 24th). As the bitcoin price continues to soar, so will the number of miners looking to enter the network, inevitably raising bitcoin energy consumption.
Bitcoin and other decentralised cryptocurrencies are being hailed as the future of finance and capital management. However, it is ironic that the “currency of the future” is largely dependent on energy sources that threaten our planet’s future.