How can a digital currency possibly harm our physical environment? If it’s all online, how can the carbon footprint of Bitcoin mining be compared with a whole country, like Argentina or Norway?
Most of the debate about Bitcoin tends to focus on the potential for profit. For example, will it continue to rise in value or implode in a spectacular crash? Of course, no-one knows for sure. But it certainly makes a good headline and generates a bit of excitement in the media.
Perhaps less obvious, is the indirect impact of Bitcoin on our collective carbon footprint. Bitcoins are generated by a digital mining process, which involves solving complex mathematical problems. And that’s what brings us to Blockchain.
Blockchain
It’s all to do with the cryptocurrency’s online ledger system, Blockchain. This is a decentralised database, specifically designed not to be owned by any one organisation or government. As a result, data is processed and shared by millions of users across the world.
With Blockchain technology, a record of Bitcoin transactions is stored under the collective control of all users. This means it’s virtually impossible to hack into the data and change it, for example, to ‘steal’ Bitcoins.
Bitcoin miners are effectively updating the Blockchain with records of Bitcoin transactions. These records need numerical puzzles to be solved and the first person or syndicate to solve these puzzles is rewarded with Bitcoin. With a current price of over £40,000 per Bitcoin (May 2021), you can see the attraction. It’s estimated that there are now over one million miners across the world, the highest concentration being in China.
And the more the price of Bitcoin increases, the more attractive mining becomes. There can only ever be 21 million Bitcoins. This is because the Bitcoin protocol was designed with a finite supply, which creates rarity. With nearly 19 million in circulation already, there are comparatively few remaining to unlock. The trouble is, as the number of remaining unmined Bitcoins declines, the harder it becomes to solve the puzzles. It needs more and more computing power as time goes on.
Bitcoin mining
Bitcoin mining does not involve physical digging into the structure of our planet. So it’s not like mining for gold or drilling for oil. But many warn of an environment impact that’s less obvious.
The volume of electricity needed to maintain this is starting to raise eyebrows. The overall power consumption of the Bitcoin network is now higher than the country of Norway. In fact, if Bitcoin were a country, it would rank 29th in the world for power consumption, according to this article by Visual Capitalist.
It’s hard to know whether the energy being sucked up by these computers is from a renewable source. The article in the link above does drill down into the source of energy being used by the Bitcoin network, if you’re interested.
Cheap electricity is clearly an advantage to miners, and this depends a lot on location. That’s one reason why the largest concentration of Bitcoin mining is in China, the world’s biggest consumer of coal.
Hence the link to the environment. Bitcoin’s carbon footprint is now reported to be as high as New Zealand’s.
Investment or speculation
You should always try to understand how and where your money is invested. The same principle applies for anyone thinking of speculating in cryptocurrencies like Bitcoin, Ethereum, Litecoin and many others. I use the word ‘speculating’ rather than ‘investing’ on purpose.
Cryptocurrency is not a ‘real’ asset as it does not provide an income and it has no underlying value. There is no interest, rental income or dividends to be earned. For those hoping to make money, it’s based purely on speculation that the value will continue to rise. Prices have proven to be extremely volatile and it’s impossible to know, for sure, what will happen in the future.
Debating the prospects of making money from Bitcoin is pretty much guesswork for most of us. The underlying technology is extremely complicated and there are concerns that ‘Bitcoin mania’ could be another bubble waiting to burst.
It’s fair to say that cryptocurrency should not make up a significant part of any investment portfolio. For speculative ‘investments’ like this, only put in what you can afford to lose. Assume the possibility of a 100% loss.
Summary
Speculation aside, you might want to consider other factors when looking at cryptocurrencies. Environmental impact could be one, based upon the huge amount of energy required to maintain the computing power.
This is not clear cut, though, and there are arguments both ways. Some will argue that Bitcoin and Blockchain could be the future for global currency. Others will argue that it should be outlawed due to its fast-growing carbon footprint.
Not all cryptocurrencies need the same level of energy as Bitcoin, so maybe other versions will come through stronger in the future. Who knows?
If you’re new to investing, try not to be swept up in the hype of sensational headlines of huge profits. Slow and steady really is the best approach for most of us. If you find it exciting, you’re probably doing it wrong.
Get in touch if you’d like to chat about how financial coaching can help you understand more about investing. The earlier you begin, the easier it will be.
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