Crypto Mining

Just how harmful is it to the environment?

Cryptocurrency is perhaps one of the most intriguing and unpredictable investments to date. It is an exceptionally volatile market backed by some of the most influential people in the world. Despite its popularity, many may be unaware of exactly how crypto coins are created through a process of “crypto mining”, and what impact that process has on the environment.

What is crypto mining?

Crypto mining is a computing process that employs complex coding to create a secure method of protecting the information that makes crypto coins valuable. It essentially creates new coins by tracking transactions and asset ownership.

The process of crypto mining is meant to be akin to mining for gold in the sense that it generates opportunities for monetary rewards. Of course, the major difference is that where gold mining requires extracting gold from physical deposits, crypto mining occurs in digital spaces. Instead of extraction, it involves production and validation. The process of mining for crypto results in producing the validity of a coin. This validation is necessary to convey its authenticity to the buyer and protect the coin from any kind of manipulation.

In the case of crypto mining, so-called miners must verify transactions by rapidly solving complex equations and completing mathematical functions. And like gold mining, this work is incredibly energy intensive.

How does it affect the environment?

An impressive system of computers and other technology is required to mine for crypto coins, especially Bitcoin. Cambridge University found that the energy consumption of Bitcoin mining is more than that of entire countries like Poland, Pakistan, and Argentina. This is because Bitcoin is the most popular, and thus the most lucrative, cryptocurrency. In 2009, Bitcoin mining only required a small setup and a few seconds’ worth of electricity to authenticate one coin. Now, expensive specialised machines are necessary, as well as 9 years’ worth of an average household’s electricity, just for one Bitcoin. It is this process of securing and validating the coin that consumes the most energy.

In addition to consuming immense amounts of energy, mining for crypto involves heat becoming a waste by-product. This sometimes requires companies to install advanced ventilation machinery to cool the workspace and, consequently, insulation systems to suppress the noise from the fans. A significant amount of e-waste is also generated. Because companies are constantly upgrading their mining technology, there is a high turnover rate that makes old machines become obsolete quickly.

Is it sustainable?

The short answer is no. Most companies that mine for cryptocurrencies have not yet established a sustainable business model. Crypto mining may have some long-term benefits associated with it; however, its excessive use of energy is difficult to justify. The more computer power a company can garner, the more coins they can secure. And the more successful a miner is, the more energy is required.

But outlawing crypto mining is not necessarily the answer. China has already banned cryptocurrency operations, and Russia is proposing to do the same. This has not solved the energy problem. To compensate for the loss of business, Chinese companies have been offshoring their crypto mining processes to countries that use more fossil fuels, like coal and natural gas. In fact, where there is the cheapest energy is where the most mining can occur.

This trend of offshoring crypto projects may become more ubiquitous. According to a recent study, Bitcoin’s use of renewable energy has decreased significantly. In 2020, it was using an average of 42% energy from sources like hydropower, solar, or wind. By August 2021, this number dropped to 25%.

Can crypto mining go green?

Of course, mining is not inherently polluting. It is its skyrocketing value that catalyses the supply and demand, consequently increasing its carbon footprint.

There is the potential for, if not green, greener cryptocurrency. Implementing more renewable energy sources into mining practices is one possibility. Some miners are also claiming to use the excess hydropower that is produced during rainy periods. This method is impossible, however, during the dry months where fossil fuels are largely necessary.

But even with greener practices, it is difficult to determine just how much renewable energy is being used to mine crypto coins. This is because crypto is a decentralised and, in some cases, unregulated currency where miners are typically anonymous.

There are some companies that recognise a social responsibility to launch sustainability programmes and utilise only renewable energy. Some argue that this is an attempt to “greenwash” (present as environmentally responsible by disseminating disinformation) the truth. However, any move towards more transparent and sustainable business practices can be viewed as a step in the right direction.

Another option that is being tested by some miners is to channel the surplus natural gas that comes from drilling sites. This may prove to be unhelpful, though, as it could create a demand for more drilling.

While the most popular cryptocurrencies are finding it difficult to go green, some creators of lesser-known cryptocurrencies are promoting a new method of validating their coins. This involves a system that processes transactions through proof of ownership of sufficient coins rather than through computational labour. This would be a difficult method to make widespread use of, as stakeholders of cryptocurrencies like Bitcoin and Ethereum have an incentive to not make any significant changes.

Expanding the discourse

Ultimately, if the prices of crypto coins remain volatile, so will the energy consumption of mining. Additionally, even if environmental regulations are put in place, countries will offshore the work if it continues to be an option.

It should also be taken into consideration that mining for gold uses more than four times the energy as crypto mining. Therefore, if one is going to be highly criticised, it is important to account for how demonising one market may impact the markets as a whole and the finance sector at large.

Private Client Consultancy is committed to putting sustainability at the center of its investment process.

Contact us to set up a free consultation with one of our Wealth Managers.