Cryptocurrencies have climate issues, or ‘features’, depending on your point of view. As well as being highly resource intensive, inefficient, and purposefully polluting, cryptocurrency prices are also incredibly volatile. Prices for the largest cryptocurrencies, bitcoin and ethereum, have both dropped by over 55% in the last 6 months, leading some to suggest this is crypto’s 2008 moment.
While many are blaming the crypto turmoil on a collapsing ‘stablecoin’ called TerraUSD, the current crash is more likely a perfect storm of lots of factors. For years, interest rates have been set very close to zero, making bank bonds and treasury bills look very boring, whilst Bored Ape NFTs and meme-stocks appeared far more worthwhile. Last week, the US Federal Reserve and the Bank of England increased interest rates by the largest amount since 2000. Continuing covid controls and Russia’s invasion of Ukraine have also sobered up the markets. Bitcoin was designed to be indifferent towards governments and banks, but investors generally aren’t. They’re de-risking their portfolios and dumping crypto.
Crypto’s loss, climate’s gain?
Not all cryptocurrencies have a terrible impact on the earth’s delicate climate balance. But the most polluting ‘Proof of Work’ cryptos, like Bitcoin, Ethereum and Dogecoin, together use around 300 TW/h of mainly-fossil fuelled electricity each year. Bitcoin has an annual carbon footprint of around 114 million tonnes. That’s roughly comparable to 380,000 space rocket launches, or the whole of the Czech Republic.
Proof of Work mining was designed as a controlled way of wasting energy. The process involves specialist computers taking random shots guessing a long string of digits over and over again. The amount of dedicated computing power is referred to as the network’s ‘hash rate’. If the hash rate drops for any reason, the difficulty of the guessing game is automatically adjusted every few weeks to ensure the network finds a new winner every 10 minutes. Each winner then gets a go at being the bitcoin bookkeeper and is awarded 6.25 newly-minted bitcoins.
Whether the guessing game is profitable or not depends on the miner’s set-up fees, energy costs, and other inputs. Most of the world’s PoW mining machines are powered with coal. The higher the price of crypto, the more cash miners are prepared to waste on coal, or whatever the cheapest and most reliable fuel happens to be, until the costs of winning outweigh the rewards. But the bitcoin price is now much lower than it has been over the past 6 months. And in theory that’s good for the climate. But surprisingly, the network’s hash rate (and carbon footprint) remains very close to its all-time high, averaging around 200 quintillion hashes per second. The scale of this continued interest means bitcoin mining at current prices is probably still profitable. But for how long?
Tipping points and death spirals
Bitcoin’s value has temporarily dropped below the estimated cost of production several times before, without significant long-term damage to the hash rate. But, should the market stagnate for long enough, PoW cryptocurrencies will start to see an increasing number of miners capitulate. Miners with the highest costs are likely to sell-off their bitcoin holdings as profitability drops, creating even more selling pressure in the market. Short-term capitulation among smaller mining outfits with high costs, using intermittent renewable energy, is normal. But a domino effect with major mining firms closing down one after another could cause crypto prices, and the network’s carbon emissions, to drop rapidly towards zero. This earth-saving event in crypto-speak is called a bitcoin death spiral.
Besides bitcoin mining price predicaments, there are other potential tipping points to consider. Many big name investors are currently sitting underwater weighed dowith big bags of bitcoin, especially those who bought in at higher prices. With around 130,000 bitcoins on its books, the American software company, MicroStrategy, owns more bitcoin than any other corporation. They recently purchased 660 bitcoins for $25 million as the market crashed. According to the company, if the bitcoin price fell below $21,000, MicroStrategy could face margin calls from its creditors, which might force the company to sell bitcoins and other assets.
El Salvador’s President, Nayib Bukele has also reportedly just brought his country's total reserve of bitcoin up to around 2,300, or about $72 million at current prices. His country's crypto losses are adding to fears of an imminent debt default that would cause significant pain to those who had no say in their leader’s crypto gamble.
Ban or boycott
Prominent investors may find bitcoin bear markets a bore. But our research shows the climate losses from high-priced cryptocurrencies are far more disturbing. Unsustainable upward trajectories disproportionately impact poor and vulnerable communities where miners and developers are taking advantage of economic instabilities, weak regulations, and access to cheap resources. These communities also face the sharp end of the climate crisis.
Governments globally want to be seen as keen on crypto as a tool for growth. But the crash shows that bitcoin is both useless as a mainstream means of exchange, and as a reliable store of value causing most users far more pain than profit. In the aftermath of the 2008-2010 global financial crisis, governments came together promising a crackdown on toxic financial instruments with make-believe valuations. For the global climate and a stable economy, cracking down now on crypto will be win-win for everyone. But, if environmental regulation efforts are not globally coordinated or far-reaching, crypto’s climate contagion will get parked.
A version of this article was published in The Conservation.