In February, Elon Musk made a big stir in the bitcoin community by announcing Tesla would soon start accepting bitcoin in payment for its cars. He made an even bigger stir three months later when he reversed the payment policy, citing environmental concerns.
It was a moment — yet another moment — that brought bitcoin’s staggering electricity use and the pollution that comes with it into focus. It is also a growing concern among the many corporations with highly publicized pledges to clean up or offset their carbon footprint.
It’s becoming business issue, as the growing number of investors and investment firms with ESG — environmental, social and governance — concerns focus on the pollution caused by the mining of the two largest crypto blockchains, bitcoin and Ethereum. ESG has been called shorthand for an ethics “score” that companies can use — and publicize.
The same thing applies in the political and regulatory sphere. Last year, Treasury Secretary Janet Yellen said bitcoin is not only “an extremely inefficient way of conducting transactions … the amount of energy that’s consumed in processing those transactions is staggering.”
Now, Congress is getting in on the act, according to crypto industry news outlet The Block, which reported today that multiple sources confirmed that the House Energy and Commerce Committee’s Oversight and Investigations subcommittee is gearing up for hearings and looking for witnesses on the subject.
It’s not alone. In November, Sweden called on the European Union to bitcoin-style mining, saying the bloc could not reach its Paris Climate Agreement goals without doing so.
Read more: Sweden Calls on Europe to Pull the Plug on Bitcoin Mining
A staggering cost
Yellen’s term, “staggering,” is a word that comes a lot when discussing bitcoin’s annual power requirements, currently nestled between that of the Ukraine and Egypt. It was used in a letter more than 70 environmental and business organizations ranging from the Sierra Club to the Small Business Alliance wrote to the leadership of the House and Senate in October. And also by the CIO of Société Générale’s U.K. private banking operation in an interview nearly a year ago.
Others bring a richer vocabulary. In a Jan. 3 tweet, Jamie Zawinski, co-founder of the Mozilla Foundation which develops the FireFox browser, recently criticized the organization for accepting cryptocurrencies, dropping several F-bombs before saying: “Everyone involved in the project should be witheringly ashamed of this decision to partner with planet-incinerating Ponzi grifters.”
Investors are hearing more than generalities.
“Institutional investors may have more exposure to cryptocurrency risk than they realize,” investment advisor MSCI’s ESG division warned in an October 2021 blog post. “Institutional investors may be experiencing a ‘creeping’ exposure to cryptocurrency, as new companies built around the asset class are added to indexes and older, established companies invest in cryptocurrency.”
The firm, which has more than 1,500 ESG Indexes dating back as far as 1990, noted that 26 of the companies in its flagship MSCI ACWI Index have cryptocurrency exposure.
That’s what drove Musk’s decision to stop accepting bitcoin payments.
“We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel,” Musk said. “Cryptocurrency is a good idea … but this cannot come at great cost to the environment.”
What’s the problem?
Let’s back up for a moment to look at what the actual problem with bitcoin mining is.
It’s fairly simple if you can brush over a few technical terms. Basically, blockchains work by adding new information to a ledger that once written in cannot be changed, only updated. The way it is updated — the way new blocks of transaction data are added to the chain — is by people who collect new transactions, validate their accuracy, and then bundle them into a block that is added to the blockchain. In exchange they get transaction fees and a cache of newly created, or “mined,” bitcoins.
The process is kept honest and fair by randomly choosing each block’s miner. This is done by a race to solve a math puzzle that gets easier or harder depending on the number of miners, in order to mint one new block every 10 minutes. It’s called proof-of-work, or PoW.
Which was great in 2009 when bitcoin was created and the bitcoins were worth next to nothing. But as BTC’s value started reaching thousands and then tens of thousands of dollars, an arms race began, with mining investors pouring millions of dollars into server farms of thousands of highly specialized computers designed to do one thing: mine bitcoin. It’s high-powered computing, and it sucks up as lot of power, 204.50 Terawatt-hours at present, according to the Bitcoin Energy Consumption Index. That’s about as much as Thailand.
Worse, most of those mining farms are — or were — located where power was cheapest. Which means old, outdated coal plants that have trouble competing. More than half of the mining power was in far-flung regions of China until the government banned mining in June, citing increasing pollution and rampant power shortages.
See also: Bitcoin Falls As China Continues Halt On Mining
What’s the solution?
When that happened, many fled to the U.S., with many focusing on sites with access to hydroelectric or wind energy, which can be cheaper as well as greener.
In the wake of Musk’s bitcoin bombshell, he supported and encouraged a move to create a Bitcoin Mining Council to promote the use of green energy by miners and publicize it. In July, the organization estimated that 56% of all bitcoin mining uses green power. Of course, it was based on a member survey, so take it with a grain of salt.
But that leaves two related problems. One is competition for power. A number of miners landed in welcoming Texas, which has wind energy, but also a grid that has been failing with startling regularity lately. Other hit upstate New York, where hydropower is available.
But that doesn’t satisfy crypto’s ESG opponents. For one thing, they note, green power used by bitcoin mining cannot be used by other customers, who might buy more from dirtier sources.
Still, crypto’s story will get a big boost in the next year or two, when the Ethereum blockchain completes the years-long process of switching from proof-of-work to a different method called proof-of-stake, or PoS, that uses virtually no power. There are other, bigger reasons for the move, notably that it will allow the clogged Ethereum blockchain to scale up to handle vastly more transactions.
It will also remove an electrical thirst that currently measures 105.09 TWh per year, about the same as Kazakhstan. Add that to bitcoin’s 204.50 TWh per year and you’re somewhere between Italy and the U.K.
However, for bitcoin, the developer infrastructure, need, and will for a multi-year project just doesn’t exist. And if ESG growing influence starts to drive investors away, bitcoin’s got a problem.
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