Is cryptocurrency environmentally-friendly?

By Duncan Ferris

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Some investors will find the idea of environmentally friendly cryptocurrency to be irresistible

The last few years have seen the world go cryptocurrency mad. Everyone who said the idea was merely a fad when Bitcoin first emerged has been proved conclusively wrong.

But how do cryptocurrencies fit in to the quest to reach carbon neutrality and just how green are they right now?

Greener shades of coin

Environmentally friendly cryptocurrencies do exist. You can get in on the craze without feeling wracked with guilt about the emissions you might be responsible for.

Cardano is the most notable of the cryptocurrencies seen as having green credentials. The coin is not strictly green, as it still has a carbon footprint. However, it is far less energy intensive than the main crypto players. This is because it uses a proof-of-stake model, rather than proof-of-work. As such, mining is unnecessary and so there are no legions of CPUs unlocking new units of the currency.

There are other cryptocurrencies which are more explicitly environmentally friendly. Algorand is completely carbon neutral. BitGreen financially incentivizes environmentally friendly actions. SolarCoin rewards the generation of clean solar power.

The main issue to note with these coins is that they do not make up the bulk of the crypto market. They are mainly just a drop in the ocean. Cardano is a fairly large player, but right now the big cheeses still dwarf it. Big cheeses like Bitcoin.

Is Bitcoin getting greener?

Bitcoin still seems to be the king of crypto. However, the cryptocurrency has a bad reputation when it comes to carbon emissions. The problem is that mining for the coins, which is the creation of new coins, is extremely energy intensive. The process sees mining rigs, which are essentially purpose-built computers, completing complex calculations in order to unlock new units of the currency. This process is called a proof-of-work model.

Research released by Cambridge University in February found that Bitcoin consumes around 121.36 terawatt-hours (TWh) a year because of this model. This amounts to higher annual energy usage than the whole of Argentina.

However, that could all be changing. Hut 8 Mining chief executive, Jaime Leverton, told the BBC’s Tech Tent programme that Bitcoin mining equipment is becoming much more energy efficient and argued that more and more of the energy used in mining comes from renewable sources.

However, there are still issues. Many commercial Bitcoin miners replace their rigs frequently. Northumbria University senior lecturer in international development, Peter Howson, claimed in February that the redundant units, which cannot be easily repurposed for non-mining use, create around 11,500 tonnes of electronic waste each year.

Some facets of the mining process might be becoming greener and as more and more available energy comes from renewable sources the currency is likely to get more environmentally friendly. Problems do remain though, and the currency is very far off being truly ‘green’.

What comes next?

A sign of great progress in the world of crypto is the emergence of the Crypto Climate Accord. More than 150 individuals and companies within the crypto and finance, technology, NGO, and energy and climate sectors have signed the agreement. The agreement calls for the entire crypto community to focus on decarbonizing the industry.

The group seeks to push this agenda by providing an open-source guide of decarbonization solutions for the industry. It also encourages carbon accounting, carbon offsetting and green reporting. It will be interesting to keep an eye on the organisation’s development and see how well it can deliver on its aims to decarbonise the industry.

Other developments include wider changes in the industry. Cryptocurrencies seem to be moving away from the kind of ‘proof-of-work’ requirements that Bitcoin uses for coin creation.

For example, Ethereum, which is the second largest coin behind Bitcoin, is converting to a ‘proof-of-stake’ model. This removes the need for mining and will thus sharply cut down on the energy use that the currency is responsible for. However, it is important to note that the proof-of-work model is still in place, with regular updates slowly adapting the Ethereum to the point where it can make a full transition.

Ethereum’s story appears to sum up where cryptocurrencies stand at the moment. Generally, crypto is not yet green, but there is strong evidence that the industry can and will decarbonise in the near future.

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Topics:
Cryptocurrency
ESG

Author: Duncan Ferris

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Duncan Ferris does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Duncan Ferris has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.