The Dark Side of Bitcoin Explained

In May 2021, Elon Musk tweeted this. Below this tweet, he attached a note saying Tesla would no longer accept payments in Bitcoins. You might know that Musk has a huge influence on cryptocurrency. His Tweet can change the trajectory of the entire market. And that’s what happened. This tweet caused Bitcoin to crash by 12%. But when Musk tweeted this, he wasn’t doing so because he was unsure of their financial viability. Rather he was concerned about bitcoin’s environmental impact.

He said that “cryptocurrency is a good idea on many levels…but this cannot come at great cost to the environment”. And Musk was right. Some researchers at Cambridge University have criticized the mining of cryptocurrencies like Bitcoin for their energy consumption. Take a look at this graph which shows the energy consumptions in different countries in the world. And here is the energy consumption of Bitcoin. This means that if Bitcoin were a country, it would’ve used more energy than the entirety of Argentina in a year. Bitcoin’s energy usage, which is close to 0.5% of all the electricity consumed in the world, has increased about tenfold in just the past five years.

Now on UPI, Indians do nearly 10 crore daily transactions. Whereas globally, Bitcoin only registers 4 Lakh daily transactions and at the same time consumes so much energy. So why does Bitcoin use so much energy? What are the views of people? And what are the different alternatives used by other cryptocurrencies in the crypto-world? This is what we’ll discuss in this video. First, let’s try to understand why Bitcoin’s energy usage is so high. Now I wouldn’t want to explain the detailed technicalities of how Bitcoin works.

Let’s use a simpler approach instead. Let’s say you want to buy something and pay with Bitcoin. The first part is quick and easy: You’d open an account with a Bitcoin exchange like Coindcx – which has sponsored this video but more on than later – and this exchange lets you purchase Bitcoin by converting Indian Rupee. You now have a “digital wallet” with some Bitcoin in it. To spend it, you simply send Bitcoin into the digital wallet of the person you’re buying something from. But that transaction, or really any exchange of Bitcoin, must first be validated by the Bitcoin network. In the simplest terms, this is the process by which the seller can be assured that the Bitcoins he or she is receiving are real. And this verification process consumes huge energy.

Let’s try to understand the reason behind it. To verify a transaction, several people are competing against each other. They basically use powerful computers to try to beat each other and validate the transaction. Because if they are successful, they’re rewarded with newly created Bitcoin, which is worth a lot of money. This competition for validating a transaction is called “mining.” How does this mining really work? This article provides a good analogy: Imagine you’re at a casino and everyone playing has a die with 600 sides and not 6! The winner is the first person to roll a number less than 10. If you had a normal die with 6 faces, you could’ve rolled a number less than 10 for sure. But you had a die with 600 faces, it’s difficult to roll a number less than 10. Rather than one die, if you have more dies, it becomes easier to roll the desired number.

This is analogous to Bitcoin mining competition. The miners are upgrading their computers and using more powerful ones to win this guessing game. This way they can validate the transaction and earn some Bitcoin as a reward. Hence, as the miners are using powerful computers, energy consumption has soared. And this energy consumption is why people like Elon Musk have criticized Bitcoin and why people are more optimistic about other cryptocurrencies that don’t rely on this method. The high energy consumption is why there isn’t a lot of mining that takes place in India because of the higher relative electricity costs as compared to other countries like Kazakhstan. As far as buying, selling, trading, or holding cryptocurrencies is concerned, it remains legal in India.

Given the energy and resources that are required to mine bitcoins, the entire mining business is being consolidated by a few companies. Why are people spending so much on these setups? Because the value of Bitcoin has increased significantly. So the miners believe that by using high-powered computers they would be able to mine Bitcoins. Then they could sell Bitcoins for a higher value. This system ensures that you can’t fake a Bitcoin transaction. If you want to fake a transaction, you’d have to use powerful computers and solve mathematical problems. Basically, you’ll have to spend a huge sum of money to fake a transaction.

Hence, it’s difficult to fake a Bitcoin transaction. But the downside is the amount of electricity required to approve such transactions. The electricity required to mine one Bitcoin is equivalent to the electricity used by an average US customer for 9 years! For a long time, China was the main country that was responsible for Bitcoin mining. Till late 2019, it accounted for 75% of Bitcoin mining. But partly because of environmental concerns, the country has cracked down on its bitcoin mining industry and China’s share has fallen to 45%. And electricity consumption is not the only issue with Bitcoin. As people buy new technology to mine bitcoin the older technology hardware getting discarded as useless. So the consumption of electricity and electronic waste make Bitcoin unsustainable. So is there a way to make Bitcoin sustainable?

One plausible solution is shifting to renewable energy sources like wind, solar power for fueling Bitcoin mining. Globally, estimates of Bitcoin’s use of renewables range from about 40 percent to almost 75 percent. But Benjamin A. Jones, an assistant professor in economics at the University of New Mexico, says that it is likely that most Bitcoin mining takes place using fossil fuels, which we as know are a significant contributor to global warming. Many experts have suggested that to reduce the consumption of electricity, Bitcoin should switch to an alternative system to validate the transactions. Other cryptocurrencies use a different system known as ‘proof of stake’.

Cryptocurrencies like ethereum, cardano, stellar, etc. use this system and consume lesser energy. While Bitcoin relies on the “Proof of Work” other cryptocurrencies rely on “Proof of Stake”. According to some researchers, the “energy consumption for proof of stake is 99.99 percent lower than proof of work”. Let’s try to understand the difference between the two. The “Proof of work” system requires people to compete against each other by solving mathematical problems to validate transactions. In the “Proof of Stake” system, instead of several people competing against each other, the system appoints one persona as an authorizer based on several factors, one of which are their “stakes.” Stakes are basically a security deposit. Simply, the higher the security deposit higher are the chances of you becoming the authorizer.

The person who is held responsible as an authorizer then needs to validate the transaction. If other people on the network find that actually, the transaction was fake, the security deposit of the authorizer is taken away. This reduces the probability of someone faking a transaction because if you do so you lose your security deposit. In the ‘Proof of Stake’ method, only a single person is authorizing a transaction and there’s no competition either. Thus it consumes less energy. Many cryptocurrencies use this method. Some currencies like Etherum are even trying to transition from Proof of Work to Proof of Stake. It’s difficult to make such a transition in the case of Bitcoin as the system is controlled by many.

The miners would resist the change as they’ve already developed a system suitable for mining and don’t want to give away their competitive advantage. This is why Bitcoin miners are moving away from China to countries that offer cheap electricity such as Kazakhstan and even Texas in the United States. It’s a well-known fact that Bitcoin isn’t environmentally sustainable. This is what the environmental experts believe but the market believes something else. The tweet in which Musk announced that Tesla would no longer accept payment using Bitcoins was followed by an announcement stating he personally owns Bitcoins as he believes in them. That’s why the community of Bitcoin has no regard for the sustainability of the environment. We might be innovating rapidly in the field of finance but it will leave a mark on the environment forever.

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