The environmental ethics of investing in cryptocurrency are very difficult to ignore
Happy 2022! Make it awesome.
Welcome to the first Byte Size post of the year.
Spend time talking to people who love cryptocurrency and you might hear that they are part of a movement to change the world. He might say that he is a pioneer of the movement to take over the traditional banking system, leading the shift from fiat currency to a brighter decentralized future.
You can not hear about how Bitcoin has a carbon footprint the same as Kuwait, or if a single Bitcoin transaction has the same carbon footprint as watching 180,000 hours of Youtube. It has a small electronic waste (i.e. hardware) similar to the Netherlands. Ethereum has the same carbon footprint as Hungary.
While Bitcoin and Ethereum aren’t the only culprits, they are the biggest, and most tracked, cryptocurrencies. A currency that uses a proof-of-work algorithm that is an environmental problem because it relies on so much energy to mine the coins.
Whether crypto enthusiasts are right or wrong about the future of decentralized finance is not the issue for this post. The most important thing is how speculative investments, which are almost never made for goods and services, compromise climate initiatives.
Cryptomining is energy-intensive, and environmental damage is literally incentivized
Cryptocurrency mining is a time-consuming endeavor. Mining involves solving complex equations to create new coins. More computing power = more equations solved = more coins. It’s a little more complicated than that, but that’s the gist.
Bitcoin and Ethereum become harder to find as more coins are mined, so the amount of computing power required increases. They rely on a proof-of-work algorithm that requires miners to put in effort (i.e. computing power) to solve equations and be awarded currency. This is why it is so energy-intensive.
At the time of writing, Ethereum is moving to a more sustainable proof-of-stake algorithm where entities are algorithmically selected to verify transactions based on their stake in the network.
As coins become rarer, prices rise with buyers speculating that the future value will be greater than the present – further incentivising more computing power and energy consumption to mine coins. This is a terrible incentive mechanism from an environmental perspective.
Mining is becoming energy intensive which is threatening reverse carbon reduction results from transitioning to electric vehicles and reducing fossil fuels. His Bitcoin energy consumption is similar to Thailand. Ethereum’s it is comparable to Kazakhstan.
Theoretically, if all the energy was renewable, or if mining happened at a time when the power grid was not under pressure, there would be no problem. Unfortunately, it’s not like mines happen regardless of timing or the level of renewable energy. For example, there is a lot of mining in Kazakhstan that depends on fossil fuels.
Investing in cryptocurrency is usually speculative, and not profitable enough to justify the environmental costs
Costs for the cryptocurrency environment are not automatically bad. It depends how much value offers cryptocurrency – and it’s definitely worth it. Cryptocurrency is safe, easy to transact and private.
But this does not outweigh the environmental losses and costs.
It’s very easy to lose currency – and not just to hacks, but ‘accidents’ (ie entering the wrong address) during transactions.
Bitcoin is only accepted as legal tender in El Salvador. Many other countries such as the US allow Bitcoin to be used, but it is rarely transacted for goods and services. Ethereum hasn’t gotten far yet.
Investing in cryptocurrencies is usually speculative, assuming that the currency will provide significant value in the future. This makes the environmental damage worse because many investors see little value now – usually in terms of future value, which may never be realized. It seems reckless.
If the cryptocurrency offers significant functional value, there may be a greater reason for the fee – but there’s not much to shout about at the moment. To be clear – there is value in the blockchain, but unlike cryptocurrency, it is a medium of exchange enabled by the blockchain.
Where is the intervention?
It is promised that many new cryptocurrencies do not rely on proof-of-work algorithms, and have lower energy costs. But that still leaves the problem of what to do to manage the environmental costs of cryptocurrencies that rely on proof-of-work algorithms and will be around for some time.
Government intervention to deal with environmental costs is necessary but slow. There are various options available such as a carbon tax or reporting requirements. For example, regulators could impose a carbon tax on Bitcoin miners.
It would be nice if the industry could regulate itself, but the environmental costs are too high and there is no time with many countries. struggling to meet carbon reduction goals like that.
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