Bitcoin's climate change impact under scrutiny

By Andrew Ross Sorkin,

“Bitcoin uses more electricity per transaction than any other method known to mankind, and so it’s not a great climate thing.”

That was what Bill Gates recently told me.

At a time when companies and investors increasingly say they are focused on climate and sustainability issues, some of them may be about to collide with the reality of another financial trend, one currently worth about $1 trillion: Bitcoin.

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The cryptocurrency has become inescapable, with big companies like Tesla and individual investors alike rushing to stock up on the digital token.

But depending on which study you read, the annual carbon emissions from the electricity required to mine Bitcoin and process its transactions are equal to the amount emitted by all of New Zealand. Or Argentina.

To put this into perspective, one Bitcoin transaction is the “equivalent to the carbon footprint of 735,121 Visa transactions or 55,280 hours of watching YouTube,” according to Digiconomist, which created what it calls a Bitcoin Energy Consumption Index.

(Critics of this comparison point out that the average Bitcoin transaction is worth about $16,000, while the average Visa transaction is worth $46.37, but you get the point.)

And as Bitcoin becomes more popular, the more resources its ecosystem consumes. What is happening, in a nutshell: So-called miners verify transactions involving the cryptocurrency by using computers to solve increasingly complex mathematical equations. They earn bitcoins for their work, meaning that the more popular the currency becomes, the more competition there is to mine new tokens.

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“As the resource intensity of running Bitcoin has increased over recent years, it has become a serious concern for its potential impact on health and climate,” Alex de Vries, a data scientist who put the index together, wrote in the journal Energy Research & Social Science.

All of which raises a crucial question: Does the movement among investors toward companies that rank highly for environmental, social and governance issues pose an existential threat to Bitcoin’s success?

After all, Laurence Fink, chief executive of BlackRock — the largest money manager in the world, with $9 trillion under management — has said that all investments the company makes in the future will be evaluated, in part, on how they plan to meet the climate challenge. Perhaps more important, investors are clamouring for companies to disclose their carbon footprint, and a group called the Task Force on Climate-Related Financial Disclosures is working on creating a global standard.

If that’s the case, how will investors view the likes of PayPal, which has been a vocal proponent of climate initiatives — but last fall announced plans to allow customers to conduct transactions in Bitcoin?

Or what about Square, the payments company founded by Jack Dorsey? It has become one of the most public proponents of Bitcoin, both dealing with transactions and also keeping the cryptocurrency on its own balance sheet. It holds about 5% of its cash reserves in Bitcoin, whose price has historically been deeply volatile.

Then there is Tesla — a company whose entire premise is to help reduce climate change through lower carbon emissions — which has invested more than $1.5 billion of its balance sheet in Bitcoin. How would its Bitcoin holdings affect its sustainability score?

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Other companies are also considering whether to add Bitcoin to their balance sheets. And financial firms like Guggenheim Partners have already invested in Bitcoin while Bank of New York Mellon says it will start financing Bitcoin transactions.

Even Fink’s BlackRock has started to, in the words of a senior executive, “dabble” in the cryptocurrency by potentially allowing two of its funds to invest in Bitcoin futures. Rick Rieder, the firm’s chief investment officer of fixed income, cited investors’ interest in the asset and its increasing adoption by younger, tech-savvy customers.

So far, Bitcoin’s carbon problem hasn’t slowed down its price, which was hovering Monday night around $50,000 for a token, up from about $8,000 a year ago.

Its carbon problem is hardly a secret. As The Independent recently noted, Hal Finney, one of the early cryptologists, posted on Twitter in 2009: “Thinking about how to reduce CO2 emissions from a widespread Bitcoin implementation.”

Will owning bitcoins become a status symbol — or a scarlet letter for a new generation of climate-focused investors wise to the challenges it poses?

The answer is complicated.

Bitcoin supporters say that estimates of its carbon footprint are overstated. And if the computers that mine and help transact bitcoins are attached to an electric grid that uses wind and solar power, they add, mining and using it will become cleaner over time.

“We believe that cryptocurrency will eventually be powered completely by clean power, eliminating its carbon footprint and driving adoption of renewables globally,” Dorsey of Square said in a statement as part of a commitment for his company to be net-zero on carbon emissions by 2030. The company committed $10 million to invest in new “green energy technologies within Bitcoin mining, and aims to accelerate its transition to clean power.”

Also read: Bitcoin on your balance sheet? Here's all you need to know

On this point Gates, who considers himself a Bitcoin sceptic unrelated to the climate issues, said it is possible that the challenges could be overcome, but he wasn’t convinced just yet.

“If it’s green electricity and it’s not crowding out other uses, eventually, you know, maybe that’s OK,” he said.

Several companies are working on some counterintuitive ideas to turn Bitcoin green. On Monday, Seetee, an investment company involved in cryptocurrency, said it planned to invest in Bitcoin “mining operations that transfer stranded or intermittent electricity without stable demand locally — wind, solar, hydro power — to economic assets that can be used anywhere.”

In other words, the company plans to build wind and solar in places that might not be perfectly situated for the technology and will use the extra power to mine Bitcoin, making money in the process. “Bitcoin is, in our eyes, a load-balancing economic battery, and batteries are essential to the energy transition required to reach the targets of the Paris agreement,” the company said in its announcement.

There are also new ways to conduct greener Bitcoin transactions. For example, users could batch transactions on something called a Lightning Network, essentially a payment channel between two users that would use less power to process transactions.

PayPal, too, argues that those new protocols may change Bitcoin’s carbon footprint: “Not only are we assessing the climate impact of cryptocurrency, which is concentrated on Bitcoin, but also the entire industry is evolving in the assessment and measurement standards of the potential environmental impacts and more energy-efficient protocols are emerging.”

In the near term, nearly two-thirds of all Bitcoin mining is taking place in China, and “mining activities can also be found in regions with coal-heavy power generation, such as in the province of Inner Mongolia,” according to a study in the scientific journal Joule, which also raises the idea of imposing a carbon tax. “Regulating this largely gambling-driven source of carbon emissions appears to be a simple means to contribute to decarbonizing the economy.”

As for Fink of BlackRock, he said he was still sceptical of the entire idea of Bitcoin, before he can even contemplate the climate issues. “We are watching it,” he said. “Right now I’m more focused on efficacy.”