Cryptonite; Let’s Talk Energy and Crypto

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Cryptocurrencies gave investors and observers a riveting spectacle over the last few weeks. Headlines — including China’s move to curb crypto transactions — have caused dizzying volatility and serious selloffs. One particular area of concern circling the crypto-space is energy consumption, an issue that recently sent Bitcoin’s value into freefall after Elon Musk decried its environmental impact and announced that Tesla would no longer be accepting Bitcoin as payment.

Does this spell the end for cryptocurrencies? Most likely not. Is Bitcoin the driving reason that the world will surpass the warming targets set forth by the Paris Climate Agreement? Also, probably not. Nevertheless, it is important to dig into the individual energy consumption profiles of cryptos, how these profiles impact carbon emissions, and what actions are being taken to remedy their negative externalities.

Just like all consumers of energy, crypto’s carbon footprint depends on the source of that energy. Cryptocurrencies do consume a substantial amount; Bitcoin alone uses approximately 113 TWh annually. For comparison, the entire energy grid in the Netherlands uses 111 TWh, and Google uses 12 TWh. If Bitcoin were a country, it would rank 29th out of a theoretical 196 in terms of energy consumption. The vast majority of this consumption occurs during the mining process, when miners (or “hashers”) solve 64-digit hexadecimal solutions to update the Bitcoin ledger, or blockchain.

Given that mining can be done anywhere with internet access, these hashers actually use relatively diverse sources of energy, with the most commonly used source being hydroelectric. Many hashers, however, also use other sources such as coal and natural gas. A 2020 study found that 76% of hashers use renewable energies as part of their energy mix, and 39% of hashing’s total energy consumption comes from renewables. While this 39% is certainly not preferable to something closer to 100%, compare that to the EU’s gross final energy consumption from renewables of 19.7%. Additionally, as crypto can really be mined anywhere, companies have set up shop in unique places that provide additional opportunity to increase use of renewables in a way that many other industries currently find difficult due to the need for transmission and/or storage.

Some groups within the crypto mining industry are further encouraging these more sustainable practices, whether they be ESG-minded hashers, or members of the Crypto Climate Accord which “aims to achieve net-zero emissions for the entire industry, including eliminating all historical emissions by 2030.”

Some cryptocurrencies are making significant changes to their structure. Ethereum, a leading open source blockchain on which the cryptocurrency Ether is built, is moving towards a “proof of stake” (“PoS”) model, which Ethereum Foundation researchers indicate would reduce consumption to 1/10,000th of the energy currently used by the Ethereum network. Ethereum now expects to complete the transition to PoS in the coming months, and other coins currently using PoS such as Cardano and Tezos are gaining traction. “Green” coins such as Chia are also growing, Chia Network now seeking to IPO this year. This coin uses a “proof of space and time” model which uses significantly less energy, and is being marketed as an eco-friendly alternative — although the e-waste generated by this coin has led to some debate about this designation.

Cryptocurrencies have a long way to go to both reduce their energy consumption and shift their energy reliance away from fossil fuel sources. However, interesting developments are already in the works. This combined with their potential to be a tool for alleviating serious societal challenges provides the innovative currency system an outlook that will, at the very least, be fascinating to watch.

Madelyn O’Farrell, Investment Analyst

Bitcoin attempts to close in on $40,000 after Elon Musk said he spoke to miners about energy usage: after plummeting from $59k on May 8th to $34k on May 23rd, Bitcoin got a slight boost, likely thanks to Elon Musk. Following his critique of Bitcoin’s substantial energy consumption and environmental impact, Musk held conversations with Bitcoin miners about increasing their use of renewable energy sources. Following the announcement of this discussion on May 24th, the coin’s value jumped 4% to $39.8k.

Learn a bit about how blockchain technology can affect our day to day lives — from voting to healthcare — here.

Proof of Stake is a new model which is gaining traction with new coins like Cardano, and crypto leaders like Ethereum.

New commercial services companies like Genesis Mining now enable crypto mining on server farms that use only clean, renewable energy.

This newsletter is intended solely for informational purposes, and should not be construed as investment/trading advice and are not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned. Any reproduction or distribution of this document, in whole or in part, or the disclosure of its contents, without the prior written consent of Flat World Partners is prohibited

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