As Bitcoin (BTC) has become increasingly popular, questions regarding how it actually works have arisen among investors and the general public.
One of the most pressing questions is regarding the potential environmental impact of cryptocurrency mining, which is the process the blockchain or distributed ledger technology (DLT)-based network uses to generate new Bitcoins and verify transactions.
Digital asset firm Coinbase clarifies that Bitcoin mining is an “energy-intensive” process. There’s no argument or valid debate regarding that, the exchange acknowledges while noting that as crypto prices surge, new miners are incentivized to take part, which in turn leads to greater energy consumption (at least until the next BTC halving, when the amount of new coins being issued will be reduced by 50%).
Coinbase notes in a blog post that “teasing out” the environmental effects of that energy use is, “like a lot of things, complicated.”
According to Coinbase, one of the myths about Bitcoin is that it is “a significant contributor to climate change.”
Coinbase reveals:
“According to the best available science, this simply isn’t true. While Bitcoin’s energy consumption is significant, that doesn’t automatically equate to it being a meaningful driver of climate change.”
The digital asset firm explains that mining is the process that Bitcoin and various other cryptos use to generate new coins and also to verify new transactions.
Coinbase also notes that large, decentralized networks of computers across the globe secure blockchains or DLT networks (the digital ledgers that document crypto transfers). In return for their computing power, miners are able to get rewarded with new coins. As explained by Coinbase, this a “virtuous circle: the miners maintain and secure the blockchain, the blockchain awards the coins, and the coins provide an incentive for the miners to maintain the blockchain.”
Last month, there had been many headlines cautioning that emissions from BTC mining in China might lead to global warming getting out of control. However, Coinbase claims that the reports in these articles were based on “deeply flawed” research data.
According to Coinbase, the numbers had been calculated from the “mix of fuels” reportedly being used by China “as a whole” — and not the real energy mix used by digital currency miners.
Since a lot of China’s electric grid is being powered by coal, these researchers had incorrectly assumed that Bitcoin must be “equally coal-dependent.”
As noted by Coinbase, here are the “facts” (according to their research and analysis):
- Miners are “incentivized to find the cheapest energy sources available.” That generally means “excess power (electricity that would otherwise be wasted) and/or sustainable energy, which is plummeting in price.”
- Half of global mining “takes place in Sichuan, China, where excess hydroelectric power allows mining to be fueled by 95% renewable energy.”
- 75% of miners “already use renewable energy as part of their energy mix.” …. the researchers behind the Cambridge Bitcoin Electricity Consumption Index have found that “Bitcoin’s environmental footprint currently remains marginal at best.”
While sharing another myth about Bitcoin, Coinbase noted that people incorrectly believe that the crypto is “incompatible with a healthy environment.”
As mentioned in a detail blog from Coinbase:
“As both crypto and green-energy technology mature, the reverse scenario is seeming more likely. Bitcoin miners are incentivized to go where power is cheapest. While that can mean some use of fossil fuels, the best way for miners to maximize profits is to find places with excess supply. In fact, Bitcoin is uniquely well-positioned to help make renewable energy cheaper and more accessible for everyone:”
Coinbase further noted that renewable energy sources generally have “excess supply.” So when the grid is not able to support that power supply, the power “goes to waste.”
Coinbase also mentioned that natural gas producers use a process known as “flaring” to burn off excess production, “harming the environment and benefiting nobody.” Bitcoin is able to convert this excess energy into “value with no net increase in emissions.”
Coinbase further explained:
“By placing mining operations at the source of green energy, utilities can monetize their excess supply. In fact, at least one publicly-traded power company has explored participating directly in mining to capture value from excess supply that can be used to build out sustainable-energy operations. By ensuring viable markets for renewable energy, Bitcoin incentivizes companies to build more green infrastructure, which further drives down the price of clean power. This virtuous cycle can actually contribute to the fight against climate change.”
Another myth about Bitcoin, according to Coinbase, is that the digital asset is “inherently less efficient” than traditional financial systems.
Coinbase points out that many of the “most alarming” headlines come from a lack of understanding regarding how Bitcoin actually works.
We may hear claims such as “Bitcoin would require 14x the world’s total electricity just to process the 1 billion credit card transactions that take place every day.” Coinbase clarified that these numbers come from “conflating the energy cost of mining Bitcoin with the cost of transactions.”
While sharing some factual information, Coinbase noted:
“Energy consumption comes primarily from mining blocks on the blockchain, not from transactions. (The ‘mining’ process accomplishes multiple goals — including both the generation of new bitcoin and the verification of new transactions. But the primary function of mining, as the name suggests, is generating new bitcoin.)”
Coinbase further noted that the energy needed to mine a block is “expected to decrease every 4 years due to a process known as the halving, where new Bitcoin issuance is cut in half.”
Coinbase added:
“The energy spent is per block, not per transaction. As tools (like batching, Segwit, and the Lightning Network) allow parties to aggregate more transactions per block, energy costs per transaction will decrease.”
(Note: for more insights on how the Bitcoin protocol and network actually works, check here.)