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It’s been three weeks since Tesla CEO Elon Musk tweeted that the electric car company ditched bitcoin as a payment option, citing concerns about the link between cryptocurrencies and greater consumption of fossil fuels.
Since May 12, bitcoin BTCUSD, -3.65% has plunged by about a third, driven in part by criticism of its carbon footprint.
But the problem is not that simple.
Today I’m joined by Alexander Benfield, cryptocurrency analyst at Weiss Ratings. Instead of focusing on overall market dynamics, talk about bitcoin and the issues with its energy consumption during the mining process.
The cryptocurrency network relies on puzzle-solving computers, which use electricity. The annual power consumption of bitcoin mining is around 130 terawatt hours, according to the University of Cambridge. To put this into perspective, the United States uses almost 4,000 terawatt hours of electricity per year.
MarketWatch: A claim that bitcoin is a big energy consumer has been around for some time. What merit is there in such a statement?
Benfield: It’s a question with a multifaceted answer. Yes, bitcoin consumes a lot of energy, but that doesn’t necessarily translate into carbon emissions. Much of bitcoin mining uses renewable energy; depending on the source, that number is between 39% and 73%, which is far higher than the percentage of renewable energy in the US electricity grid. So, even taking into account the low estimates, bitcoin is much more energy conscious than the average industry. Additionally, a considerable amount of bitcoin mining actually uses excess energy that would otherwise be wasted in areas where it cannot be exported to infrastructure in the neighboring city. For example, bitcoin miners in rural China use hydroelectric power that would otherwise be wasted due to low local energy demand and the inability to transport that excess energy to an urban power grid.
MarketWatch: Some analysts say bitcoin is actually greener than a lot of people think. What do they mean by that?
Benfield: Nic Carter has done some amazing research on this topic and is constantly trying to prove this point on TV. (Carter is a general partner of Castle Island Ventures, a Cambridge, Massachusetts-based venture capital firm.) However, many critics don’t bother to listen. Cathie Wood recently took to Bloomberg to discuss potential ways to integrate bitcoin mining into the power grids of renewable energy providers to capitalize on the intermittent periods when their excess energy is currently wasted. (Wood is CEO of active ETF manager ARK Invest.) So maybe bitcoin can actually help leverage a lot more wasted energy than previously thought.
MarketWatch: So far we’ve established that bitcoin is somewhat power hungry. What is the purpose of all this energy expenditure?
Benfield: Bitcoin energy consumption makes Bitcoin more secure. The cost of bitcoin attack increases with the increase in computing power and energy consumed by those who mine or secure the network.
MarketWatch: We hear a lot about the advent of cryptocurrencies that spend less energy than bitcoin. What can you tell us about them?
Benfield: Many green cryptos market their blockchain as being energy efficient, because it’s better than saying they have underdeveloped networks that no one uses, validates, or operates. That being said, proof-of-stake cryptocurrencies are generally much more energy efficient and new projects are likely to shift their attention to proof of stake because of the energy benefits.
MarketWatch: Will Bitcoin Evolve And Grow To Overcome Its Thirst For Energy? What’s next for the world’s most popular cryptocurrency?
Benfield: A lot of bitcoin power consumption to date has been for mining new coins, not transaction processing. Once all the coins have been mined, energy consumption is likely to decrease, as the act of validating transactions uses much less energy than coin mining. It’s also possible that scaling up solutions and upgrades that have been in the works for years could help reduce energy costs by offloading some of the transaction processing to Layer 2 or side chains. These side chains or layers 2 would then make a point of control on the bitcoin blockchain, but as with the Lightning solution, individual transactions would be handled outside of the main chain and the summaries of those transactions would be stored on the main bitcoin blockchain during those times. checkpoints.
MarketWatch: Finally, is this energy issue big enough to jeopardize bitcoin and cryptocurrencies as a store of value?
Benfield: No, at the end of the day, the question of bitcoin power consumption comes down to whether the consumption is worth it. Bitcoin users will eventually have to demonstrate the societal value of bitcoin to the world to justify its energy footprint.
Global Thinking
Here. After having this conversation with Alex, reviewing the research of Nic Carters (link is above, I highly recommend that you read it) and other articles on the subject, it seems that there are many issues regarding the Bitcoin’s carbon footprint could have been exaggerated or simply distorted.
Determining the effect of bitcoins on the environment requires a lot of overall thinking. It’s easy to miss the forest for the trees, and even easier to trust information that has since been debunked, simply because it promotes cognitive bias.
In my opinion, cryptocurrencies are not going away, and at first glance neither is bitcoin. The current market action does not look like anything out of the ordinary, but more volatile crypto action, like the one we have seen in the past. This crisis is probably just a pause.
What do you think? Do you support the use of bitcoin or do you prefer to invest in one of the green cryptocurrencies? Which?
Let me know in the comment section below.
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