What is bitcoin and is it bad for the environment?

The lowdown on the latest cryptocurrency craze.

Maddy Guest and Sophie Dicker are the co-hosts of You’re in Good Company, an investing podcast striving to disrupt the norms in the finance industry. An Equity Mates Media production, each week they walk through the basics of the share market, break down all that pesky jargon and interview some of the best investors in the business, so that we can all feel empowered to make our own investment decisions. Find their podcast on Spotify or Apple Podcasts.

If you’re on the internet, it’s likely that you’ve heard of cryptocurrency, or more specifically Bitcoin. Put simply, these are digital currencies. This means there are no physical little gold bitcoins that you can take to the supermarket to buy your groceries and no institution or organisation (i.e. a bank) that’s controlling your transactions – they all exist solely online (aka digitally).

But to understand why Bitcoin and other cryptocurrencies may be bad for the environment, we need to do a quick crash course on where Bitcoin comes from. First, let’s talk about mining. For bitcoins to be created, they need to be mined. Unfortunately, we don’t mean mined in the traditional sense of the word, so erase the picture of huge excavators hurling dirt from the ground.

For more career and investment advice, head to our Life vertical.

In the world of crypto, mining refers to large computers (literally the size of your garage) using an excessive amount of processing power to solve wildly complex mathematical equations. An equation that has approximately a one in 1,470,588 chance of being solved. When the computer solves the equation, a new coin is released into digital circulation.

So why do huge computers doing maths all day long impact the environment? Well if you think about some of your daily tasks – plugging in your computer to charge, turning on your lights or putting a load of washing in the dryer, all of these activities are powered by electricity.

Each of these tasks, as small as they may seem, lead to the production of fossil fuels, which are emitted into the environment as CO2. So you can imagine the impact of over one million giant computers that are using processing power 24 hours a day, seven days a week. It’s likely doing some damage.

Research for the Cambridge Center for Alternative Finance suggests that Bitcoin currently consumes 0.55 per cent of global energy production, which is roughly equivalent to the annual energy consumption of small countries like Malaysia or Sweden. Other reports have modelled emissions increasing by over 40 million tonnes over the past two years, or the equivalent of 8.9 million cars added to the road, due to Bitcoin mining alone.

Whether or not you view this as a waste of energy will depend on how you view the case for Bitcoin. Some view Bitcoin as a volatile investment and its recent popularity just another phase of pandemic boredom. On the other hand, some make the case that it’s an escape from the monetary repression of institutions such as banks and governments and a way to bank the unbanked. Advocates for the latter suggest that the energy consumption may be worth it.

Setting aside your views on the future of Bitcoin for a moment, it’s important to note that industries around the world are currently facing growing pressure to limit their consumption and carbon emissions and the same challenge is faced by the 2 trillion dollar cryptocurrency industry. So can Bitcoin be mined without energy usage?

The simple answer is no – the amount of processing power the computer uses to mine coins will only get heavier, as coins become more scarce. For context, bitcoin is a finite resource and by 2032, over 99 per cent of the world’s bitcoin will have been mined. However, there is a use case for mining through renewable energy sources. It is estimated that approximately 39 per cent of Bitcoin’s energy consumption is carbon neutral.

This is because many of the major mining hubs that are in Southwest China and Scandinavia are fueled by hydropower, a renewable energy source. This could further expand to include mines being fuelled by wind and solar, which is a real possibility as governments around the world commit to climate targets.

But we have some power as well. In the same way we can invest our savings into sustainable companies and funds that foster this trend, we may see a similar concept be applied to the world of cryptocurrency in the future. Here’s hoping.

Wondering what’s next? If you’re someone with good money habits who’s over being told to stop buying avocados or ordering Uber Eats in order to get in control of your future finances, then You’re in Good Company is the podcast for you. Tune in every Tuesday on your favourite podcast platform.