It’s safe to say that few economists thought Bitcoin and other cryptocurrencies would perform as successfully as they have in the modern economy. For years, even the least risk-averse investors have cited high price volatility and lack of regulatory oversight as reasons to avoid large investments in cryptocurrencies. Yet, Bitcoin eclipsed $50,000 a coin for the first time in February 2021 and investor interest in these virtual forms of finance continues to grow.

Cryptocurrencies are a form of decentralized finance (or DeFi), meaning the peer-to-peer transactions don’t require banks or financial institutions to manage the currency. DeFi offers many benefits to the current financial system including increased financial inclusion, greater liquidity, and reduced transaction costs. However, the difficult process of “cryptocurrency mining” through which cryptocurrency transactions are constantly monitored, verified, and recorded in blockchains, leads to a high demand for energy. 

As Bitcoin and similar cryptocurrencies are digitally designed to have a finite supply, the currency cannot be devalued by inflation. A large portion of recent increases in cryptocurrency demand is attributable to investors’ interest in using cryptocurrencies as a possible hedge against COVID-19-induced inflation. Rise in demand for cryptocurrency investments has led the computer systems used for cryptocurrency mining to become increasingly more energy-intensive and costly. The resulting environmental and social impacts associated with cryptocurrency mining are ripe for intensive analysis and scrutiny. For investors looking to minimize their impact, considerations must be taken for the substantial harm that cryptocurrency mining poses to environmental and social well-being.  

Bitcoin miners earn credits by verifying 1 MB or a “block” of Bitcoin transactions using power computer technologies to be the first to arrive at the correct answer to a numerical problem. Specifically, miners must first solve for a 64-digit hexadecimal number called a “hash” and prove that their answer is the first correct solution. After “proof of work” is established, the miner is rewarded by a direct transfer of the cryptocurrency and the completed transaction is added to the ever-expanding digital network that houses cryptocurrencies known as the blockchain. According to research done by Cambridge University on the grid-intensity of cryptocurrency mining, Bitcoin alone uses around 121.36 TerraWatt Hours per year. This is greater than the yearly consumption of tech giants Google, Apple, Facebook, and Microsoft, combined; if Bitcoin were its own country, it would rank 29th globally for yearly energy consumption. This high level of energy consumption greatly exceeds the amount of wealth stored in Bitcoin. In 2020, Bitcoin accounted for 0.61% of global energy consumption while the total wealth stored in the currency amounted to approximately $162 billion or ~.04% of the total global wealth. 

Because large parts of the globe have yet to convert to a carbon-neutral energy grid, this energy-intensive system is contributing to increased carbon emissions and pollution from fossil fuel sources. Pollutants like Nitrogen oxides (NOx) and Sulfur Dioxide (SO2) that are released by burning coal and natural gas contribute to greater incidence of respiratory and cardiovascular diseases. The ensuing impact to public health stifles economic productivity and contributes to the environmental injustices resulting from structural racism and income inequality. Meanwhile, CO2 and other greenhouse gases contribute to a warming climate that threatens health and livelihoods on a global scale. 

Additionally, the energy consumption required to mine cryptocurrency has significantly risen over time. Since miners are paid directly in cryptocurrency, the profitability of mining is directly tied to the crypto’s price--leading to greater mining competition and increased incentive for individuals to invest in energy-intensive rigs that mine cryptocurrencies at a faster rate. The time required to verify a Bitcoin transaction is known as the hashing rate--as the average hashing rate for competitive mining continues to increase, miners are forced to invest in faster, more energy-intensive computers. Between 2015 and March of this year, the estimated energy consumption of Bitcoin rose from 2.25 TWh to 139.15 TWh--nearly a 62-fold increase.

Experts on Bitcoin don’t see this high level of consumption trailing off in the future, despite the finite amount of minable Bitcoin. The pseudonymous creator of Bitcoin, Satoshi Nakamoto, set a hard cap of total minable coins at 21 million. Current estimates of total bitcoins in circulation is about 18.5 million, leaving less than 3 million yet to be mined. In addition, the bitcoin rewards for miners automatically halves every four years to periodically diminish the inflation rate of the cryptocurrency. While constraints on supply may lead to a decreased incentive to mine over time, transactions using Bitcoin will still need to be verified after all the available bitcoins have been mined. The new incentive for miners will be transaction fees charged for the computational work of approving transfers. These fees are expected to significantly rise as the amount of bitcoins awarded falls. As Bitcoin becomes more scarce, investors are also likely to supplement their portfolios with other cryptocurrencies that utilize blockchain technology--the resulting shift is unlikely to result in any significant decreases in the energy consumption.

In a society that solely utilizes clean energy sources, this high energy demand would not lead to increases in harmful emissions. Yet as it stands, the proportion of renewable sources in total energy consumption for crypto mining is only around 39%, according to Cambridge University’s 2021 Global Cryptoasset Benchmarking Study. But this figure alone doesn’t represent the full environmental impact of cryptocurrency. The share of renewable energy is mainly sourced from hydroelectric generation which has been shown to disrupt aquatic ecosystems and harm biodiversity. Additionally, many dams with inadequate ecological planning have been found to contribute a greater carbon footprint than fossil fuel alternatives. These findings suggest that the estimated footprint of cryptocurrencies doesn’t encapsulate the full scope of its impacts.

Contributing to the problem is the constraint of electricity costs. As the “proof of work” makes profitable mining difficult, miners have a direct incentive to use the cheapest and most available source of electricity. An example is the Montana-based mining group Marathon who recently partnered with the coal plant Beowulf Energy to cheaply power their mining operations. While the deal allows the mining group to lower their electricity costs, the coal plant will remain open and continue to emit harmful greenhouse gases. Cryptocurrency miners’ scramble to find cheap electricity sources disproportionately affects lower-income households and marginalized communities that lack the financial resources to purchase competitive mining rigs or cover the green premiums for renewable energy sources. The resulting health costs from cryptocurrency emissions are also more impactful to communities of color that are more likely to be in close proximity to coal- or gas-fired generation plants and industrial waste sources. These social externalities must be considered as a byproduct of cryptocurrency mining, and should be integral to any future regulations that support equitable access to blockchain mining. 

But does this marginal increase in total energy reliance make Bitcoin less-impactful than traditional extractive commodities that are often detrimental to the environment? Since Bitcoin has largely supplanted gold as a go-to hedge against inflation, it is apt to compare the environmental impacts of each store of wealth. The estimated energy demand for global gold mining operations is 132TWh/year, which is around 7TWh/year less than the current Cambridge estimate of Bitcoin’s consumption. While serious corruption, exploitation, and human rights violations plagues the gold mining industry, making the physical commodity an unsustainable investment overall, the higher energy demand of Bitcoin highlights the extent of environmental harm caused by virtual currencies.

And yet, many other consumer practices have similarly high energy costs with far less media coverage of their impacts. For example, cryptocurrencies consume less energy per year than household appliances that are left plugged in after use. Such comparisons can be apt for creating greater awareness of wasteful habits, yet the exponential increase in energy consumed for cryptocurrency mining distinguishes the practice for its impact. The carbon footprint for Bitcoin and other cryptocurrencies will most likely grow long before improvements in US infrastructure and renewable energy can lead to reduced emissions. 

The benefits of cryptocurrencies should not be overlooked. The function of decentralized finance allows for greater financial inclusion and the blockchain technology has the potential to be applied to store valuable data in a number of different fields. Yet, until we see leaps in the global transition away from fossil fuels, the environmental impacts of cryptocurrencies will remain substantial. Investors looking to minimize the carbon footprint of their portfolios should look elsewhere until the environmental and social costs of digital mining can be sufficiently mitigated.