How cryptocurrency contributes to fossil fuel emissions

In February 2021, Tesla announced that it had purchased $1.5 billion in Bitcoin and planned to accept the cryptocurrency as payment, causing the price to soar to record-high numbers. However, three months later, Elon Musk disrupted the cryptocurrency market when he tweeted, "Tesla has suspended vehicle purchases using Bitcoin," citing concerns about the "rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel."

Overnight, the Bitcoin market dropped by almost 10 percent–so how founded are these environmental concerns in cryptocurrency mining, and could cryptocurrency have a clean energy future?

At its core, cryptocurrency is digital money. You can use cryptocurrency to purchase goods and services like the money you may have in your wallet or bank account. However, most cryptocurrency uses a decentralized blockchain network open to anyone instead of intermediaries–like brokerages or banks–for financial services. This blockchain is essentially a transaction ledger that tracks the records, or blocks, of when cryptocurrency transactions occur. Some of the most popular cryptocurrencies traded in the U.S. include Bitcoin, Dogecoin, and Ethereum.

Bitcoin

Bitcoin is the most traded form of cryptocurrency. A finite number of bitcoins exist–21 million to be exact–but not all of them have been mined. This means some bitcoins have not yet entered into circulation and, therefore, cannot be used in transactions. By mining for bitcoins, you can earn this digital currency without actually paying for it–think of it as if you go looking for gold and find some! Mining involves solving complex puzzles through hashing, which essentially uses a mathematical function to generate a value from a text string.

These values, or hashes, serve as "proof-of-work," meaning the worth was challenging to produce but easy to verify. Does all of this seem confusing? The critical thing to consider here is that mining for cryptocurrencies that require proof-of-work, such as Bitcoin, requires highly sophisticated computers with high processing power, which consume a lot of energy. Furthermore, as we continue mining for the finite number of bitcoins remaining, they become increasingly difficult to mine; therefore, each bitcoin requires more energy to enter into circulation as Bitcoin increases in value.

Dogecoin

Dogecoin (DOGE) is another cryptocurrency gaining visibility, especially in the EV space. While it's been around since 2013, this cryptocurrency differs from Bitcoin as it is more abundant with no maximum supply. Dogecoin grew most throughout the spring of 2021.

It also saw a brief jump after getting a callout from Tesla's Elon Musk when he announced via Twitter on January 14, 2022, that certain Tesla merchandise would only be available for purchase via Dogecoin.

While many Bitcoin enthusiasts have claimed that the energy used for mining comes from renewable sources, recent reports have shown that this likely isn't the case. According to a 2020 report by the University of Cambridge–an institution that has extensively researched Bitcoin's energy consumption–only 39 percent of proof-of-work mining is powered by renewable energy.

Considering that if Bitcoin were a country, it would rank 26th in energy consumption–ahead of countries like Malaysia, Sweden, and Argentina–this number is quite concerning. It's estimated that about 65 percent of hashing is done in China, and within China, about 36 percent is done in the province of Xinjiang (about 23 percent worldwide).

Within Xinjiang, most electricity is still produced using coal plants, which means that a substantial portion of overall Bitcoin mining energy consumption is powered by coal. In April 2021, a huge coal mine in Xinjiang flooded, prompting a safety check that closed the mine for two days. Subsequently, Bitcoin's hash rate (or the rate at which hashing is conducted) fell by 35 percent. While this number may have been exacerbated by the price of cryptocurrency dropping by about 14 percent around the same time, it's safe to assume that the coal mine played a substantial role.

Not all cryptocurrencies are created equal when it comes to energy usage. A 2021 energy analysis of cryptocurrencies by TRG Datacenters showcases the vast range in Kilowatt hour (KWh) consumed per transaction, with Dogecoin (0.12 KWh/transaction) beating out Ethereum (62.56 KWh/transaction) and coming out way ahead of Bitcoin (707 KWh/transaction).

When Tesla purchased $1.5 billion in Bitcoin, it was already widely known that the cryptocurrency contributed to fossil fuel emissions–so why did the company so quickly change its tune? Environmental, social, and corporate governance–or ESG–criteria are becoming increasingly important standards for investors, which likely influenced Tesla's decision.

Furthermore, the shortage of semiconductor chips created competition among unlikely companies. Semiconductor chips are used in many products, from smartphones to computers to vehicles to microinverters in solar systems.

While up to this point, Tesla has primarily remained unscathed from the shortage, Elon Musk said in an April 2021 earnings call that Q1 included "some of the most difficult supply chain challenges that we have ever experienced in the life of Tesla," which Tesla attributed to the semiconductor shortage as well as port congestion. Because cryptocurrency mining requires these semiconductor chips, the increased mining related to cryptocurrency has contributed to the shortage, forcing Tesla to compete for the precious semiconductor chips.

Square, a company with big stakes in Bitcoin, published a white paper titled "Bitcoin is Key to an Abundant, Clean Energy Future." The white paper explains that Bitcoin mining could be a storage solution for excess renewable energy produced during the day. If the energy can't be stored or sold back to the grid, Bitcoin miners could use it to power mining.

Square also opines that as renewable energy continues to fall in price, Bitcoin miners will use a more significant portion to power mining; however, Square isn't exactly an unbiased party (the founder has invested $220 million in Bitcoin), so we'll see if that's the case.

Some cryptocurrencies are already making strides to become more energy efficient. Ethereum, the second most traded cryptocurrency after Bitcoin, and Dogecoin announced they are changing their mining process. Instead of using proof-of-work like Bitcoin, it will use proof-of-stake, shifting its security makeup to require significantly less energy. If other cryptocurrencies like Bitcoin follow suit, this could be a game-changer.

Additional industry-wide efforts include the creation of the Crypto Climate Accord. The Accord's website notes it is an initiative led by private organizations inspired by the Paris Climate Agreement for the crypto community to focus on decarbonizing the cryptocurrency industry.

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