Bitcoin is not good for the environment. However, there are significant changes on the horizon which may change this. As of May 28, there are 10,118 different cryptocurrencies. Most of them are insignificant. The total value of all cryptocurrencies is currently $1.6 trillion. Bitcoin represents 43% of the total and Ethereum is 18%. The rest of them represent 39%. If cryptocurrencies are one thing, it is they are highly volatile. By the time you read this, the numbers just cited will be different. However, cryptocurrencies are 15% of the value of gold, so it is no longer trivial and worthy of being dismissed. I believe they are here to stay. In the grand scheme of things, as I see it, crypto is a key element in the transition from the old-fashioned system of central banks and slow processing to a more digital and innovative system for the future.
Most of the cryptocurrencies use some form of blockchain technology. The concept is instead of a central bank, there is a distributed set of servers each storing part of the distributed set of ledgers called the blockchain. The blockchain insures no money is spent twice, unlike our current system. For example, if I have $100 in my bank account and write two checks for $100 to two people, one of them will be disappointed when the check does not clear. This can’t happen with Bitcoin.
An estimated one million bitcoin miners are in operation. The miners form a consensus network across the blockchain. More than half of the miners have to agree on the details of every Bitcoin transaction. This ensures the transactions are legitimate. The consensus mechanism used with Bitcoin is called “Proof of work”. It involves intensive mathematical calculations to verify transactions and insert them in the blockchain. The process uses a lot of computer power and therefore a lot of electricity. The people performing the calculations are called miners and they are compensated by earning a share of the Bitcoin. In the early days none of this mattered much but, now that there is increased interest, things have changed dramatically. The number of Bitcoin transactions processed reached around 330,000 per day in December 2020 and close to 400,000 in early January 2021.
According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin consumes approximately 110 terawatt hours per year. This represents 0.55% of global electricity production, or roughly equivalent to the annual energy used by small countries like Malaysia or Sweden. The skyrocketing electricity use is not good for the environment and is why Elon Musk, Bill Gates, and others have sounded alarm bells. I remain optimistic as I will now explain.
The “proof of work” methodology takes a lot of work. An alternate idea called “proof of stake” is under development for use to verify new cryptocurrency transactions, add them to the blockchain, and create new tokens, all in a much more efficient way. It is already being used by some cryptocurrencies such as Cardano. Ethereum is testing “proof of stake”. Seems likely to me Bitcoin will move to “proof of stake” once Ethereum has proved the algorithm’s success. The difference in energy use is dramatic and could eliminate the current concerns. The technology is complicated and it will take time to make a transition to a new methodology.
The status of Bitcoin and cryptocurrencies reminds me of 1995 and the Internet. Connecting to the Internet back then was not easy. Today, we take it for granted but back then the Internet was just for techies. Bill Gates gave a speech in Paris which I attended. He said something like “the Internet is quite interesting but it has no place in business because it is slow, insecure, and unreliable”. Microsoft was late to buy in but, once they did, they moved very quickly and transformed the company to fully embrace the Internet.
Like the early days of the Internet, I believe cryptocurrencies are at a liminal stage. Another way to say it is crypto is an infant and is just learning to walk. In 1996, I gave a keynote speech in Paris about the future of the Internet. You can watch it on my YouTube channel here. If you do watch it, keep in mind it was 25 years ago when most business leaders had not heard of the Internet or thought it had no future.