We’re decoding the environmental impact of virtual currencies
From Bitcoin to Ethereum, cryptocurrencies are a much-hyped alternative method of payment that have been making headlines for the past few years. But the big question that’s beginning to arise is whether the energy expended on these virtual transactions could actually be having a very real detrimental impact on the planet. So, we’re here to ask: are digital denominations the face of the future, or something that could break the bank?
What is cryptocurrency?
Cryptocurrencies use advanced cryptography to create secure financial transactions, giving rise to their name. Rather than having physical cash, or transactions going through banks for verification of funds, cryptocurrencies are decentralised – they require no central bank or clearing house. Transactions take place between digital wallets, and are recorded on the ‘blockchain’, which is a public ledger.
But where does this ‘money’ come from? Founded in 2009, Bitcoin was the original digital currency, and remains the most recognisable today. ‘Coins’ are created through a process called ‘mining’, which requires specialised computers to solve intricate mathematical puzzles to find a specific number. The first to find a number which meets the network’s difficulty target is declared the winner, and is rewarded with Bitcoin. In essence, a Bitcoin can be likened to a unique serial code on a banknote. However, given it’s not a physical item, its value is determined by users agreeing upon its worth.
You can also buy Bitcoins with traditional currency, which will add units of crypto to your digital wallet, accessed with a ‘key’ that allows you to transfer these units to others.
What are the benefits?
Privacy and security
Crypto was created due to concerns around the stability of the modern financial system, with numerous banks being bailed out by the government in recent years, including Lloyds Banking Group and Natwest in 2008, while others like Bradford & Bingley went under. By focusing on peer-to-peer transfers, and eliminating third parties to verify funds, users aren’t affected by the bank’s success or failure. Additionally, data is stored in your personal wallet, and can only be accessed with a private key.
Decentralised and capped
Operating on decentralised networks means cryptocurrencies are not subject to government regulations or interventions, and given there are caps on the total number of currency available, e.g. a limit of 21 million Bitcoins was created, it’s believed this could protect against inflation. With a finite amount available, as demand increases, the value will rise in line with the market, theoretically.
Accessibility and transparency
ID checks typically performed in banks don’t apply here, which can expedite the process, allowing anyone with internet access and a smartphone to utilise it. Plus, the public ledger, Blockchain, offers full transparency of transactions.
However, there are important considerations. Given the rise in online banking, contactless cards, and Apple Pay, the drive towards a cashless society might make life simpler for some, but frustrating for those less confident with technology. Then, there are the worries of losing access to your money if you forget your digital key, along with concerns around the price being highly volatile, and a lack of financial protection.
What is the eco impact?
Transactions using digital currencies might sound more straightforward – there’s nothing physical to create, distribute, house… But it’s the process of validating and minting coins, known as ‘mining’, that requires a monumental amount of energy. For reference, the Digiconomist’s Bitcoin Energy Consumption Index reports that the annual Bitcoin carbon footprint is comparable to the whole of Sweden, with a single transaction using 778 KwH (equivalent to the consumption of a typical US household over 26.67 days).
Additionally, the mining process requires special hardware for this single purpose, which is obsolete after about 18 months, contributing significantly to waste; according to Digiconomist, a single Bitcoin transaction produces 434g of e-waste, compared to 40g created by 10,000 Visa transactions.
In a closer look at the ‘climate cost’ of producing Bitcoin, a study in the journal Scientific Reports found the climate damage created was 35% of the market value generated – similar to beef at 33%. While mining isn’t the only means of validating crypto transactions, it was the primary one used by both Bitcoin and Ethereum, the leading types, until very recently. In September 2022, Ethereum replaced the ‘proof-of-work’ mining method with ‘proof-of-stake’ in an event called ‘the Merge’, which reduced its power requirements by 99.84%! For context, that reduction is similar to the total power required for Ireland, according to the journal Patterns.
So what next? Switching to renewable energy sources to power mining would be a clear first step, or implementing carbon offsetting measures for an immediate effect. Using Ethereum’s Merge as a blueprint for rolling out proof-of-stake elsewhere would be highly effective as well, but may take time due to the cost.
While virtual transactions are looking like a reality moving forwards, it’s essential that investment is made to ensure the set-up is sustainable. Cash may become a thing of the past, but we still need our virtual money to be green.