Over the last few years, bitcoin has increasingly hit the headlines. Some suggest that it is the investment to end all investments—and others that it is little more than the latest ‘South Sea bubble’. But what exactly is it? And, more importantly for us, what is its environmental impact?
A bitcoin primer
Bitcoin is a cryptocurrency, or digital currency first ‘mined’ in 2009. It is also the first currency to be entirely peer-to-peer, with no single ‘trusted third party’ verifying transactions. It is therefore independent of banks and governments—which could be both an advantage and disadvantage. Nobody can interfere in its operation, although if it starts to threaten ‘real’ currencies, governments may be tempted to control its use. However, it is entirely dependent on the market for its value, and many investment authorities have issued warnings about it over the last ten years.
Bitcoin is controlled via blockchain. Bitcoin balances and transactions are kept in a digital ledger that is visible to all, and run by thousands of individual computers owned by ‘bitcoin miners’, the name given to those who own and run the computers that govern bitcoin, and who therefore create bitcoin. Every computer involved has the same list of transactions, so it is almost impossible to cheat the system—and that is the real advantage. Cheating would require someone to operate more than half of the computing power that makes up bitcoin—and current estimates suggest that is over 12,000 computers or nodes.
Bitcoins are kept using two keys, one public and one private. The public key is a bit like a bank account number. The private key is a bit like an ATM PIN: it is the information needed to access the bitcoin, and therefore needs to be kept safely and securely.
There is a finite amount of bitcoin in the world. In total, 21 million bitcoin can be mined. In January this year, just over 18.5 million had been mined, leaving around 2.5 million unmined.
But what exactly is the bitcoin mining process? Bitcoin is created by solving very difficult computing puzzles, which identify new blocks to add to the blockchain. Adding blocks releases bitcoins at a defined rate, currently 6.25 bitcoins per block. This is down from 50 bitcoins in 2009, through a process of halving over time.
Bitcoin can be bought and sold in bitcoin exchanges, which act a bit like real-world currency exchanges. The value fluctuates over time, depending on what people are prepared to pay. One bitcoin is currently equal to around £40,000, and they can be split into units of 100 millionths for transactional purposes. They can also be used to pay for things: some online shops do accept bitcoin, and some jobs pay in bitcoin. However, many of those who own bitcoin do so as an investment, rather than for its exchange value.
Bitcoin’s ‘dirty secret’: the environmental cost of mining
Bitcoin therefore sounds fairly benign. However, it has a dirty secret in environmental terms. Those difficult computing puzzles that need to be solved to mine bitcoin use a LOT of computing power—and that has huge environmental implications. Some estimates suggest that bitcoin mining has a similar energy demand to a small country.
Bitcoin’s advocates have answers to this. Some have suggested that bitcoin mining mostly uses renewable energy. However, this claim doesn’t stack up, because the majority of bitcoin are mined in China, which is not known for its use of renewable energy. The Bank of America has estimated that the process of buying just one bitcoin has a carbon footprint of 270 tonnes.
Other bitcoin advocates suggest that bitcoin could be used as a sort of energy bank or battery. In other words, bitcoin mines could be located next to renewable energy sources, and only draw on energy when it would otherwise go to waste because it is not needed in the grid. Bitcoin can therefore be seen as a way to store energy in financial terms.
This sort of makes sense. Unfortunately for bitcoin, though, other industries got there first—and they have a much higher claim to be essential. There are two main rivals for this surplus energy: aluminium smelting, which produces one of the world’s most widely-used and essential metals, and the hydrogen industry, focused on developing the clean fuel of the future.
The bottom line
There is no question that bitcoin is interesting in financial terms. However, environmentally, it just doesn’t stack up—nor is there any real way to balance the books.