Bitcoin and other cryptocurrencies were designed to be used as a digital currency. They’ve instead grown popular as speculative investments. Cryptocurrencies are not just resource-intensive and innately wasteful, but they are also very volatile. Bitcoin and Ethereum, the two most popular cryptocurrencies, have both plunged by over 55 percent in the last six months, prompting some to propose that regulation is required in order to calm down the market.
Some attribute the falling prices to a single contagion: TerraUSD, a sinking “stablecoin” that is meant to be tethered to the US dollar. However, the recent bitcoin market fall is more than likely the result of a number of causes.
Because interest rates have been zero for years, bank bonds and treasury bills have become dull investments, whereas cryptocurrencies and digital non-fungible tokens (NFTs) connected to artwork have become enticing. The US Federal Reserve and the Bank of England, on the other hand, just raised interest rates by the most since 2000.
The markets have also been shaken by the continuation of COVID regulations and Russia’s invasion of Ukraine. Bitcoin was created to be unconcerned with governments and banks, but investors aren’t. They’re removing risky assets from their portfolios and selling crypto.
Is crypto’s loss = climate’s gain?
Bitcoin, Ethereum, and Dogecoin, the most polluting “proof-of-work” cryptocurrencies, utilize roughly 300 terawatt-hours (TW/h) of mostly fossil-fuelled power per year. Bitcoin has a carbon footprint of around 114 million tonnes per year. This is equivalent to 380,000 space rocket launches or the Czech Republic’s yearly carbon impact.
Proof-of-work mining may be viewed as a regulated kind of energy waste. The procedure entails expert computers taking a series of random guesses at a large string of digits. The network’s hash rate refers to the amount of processing power allocated to this endeavor.
The complexity of the guessing game is automatically changed whenever the hash rate reduces for any reason, such as power outages or price declines, to guarantee the network can discover a new winner every ten minutes. Each winner is then given the opportunity to verify network transactions and is given 6.25 freshly minted bitcoins.
The cost of setting up the computers and the energy required to power them determines whether or not the guessing game is profitable. The greater the price of a cryptocurrency, the more money mining companies, are willing to spend on energy until the costs of winning surpass the benefits. According to a recent study, bitcoin’s carbon intensity increased by roughly 17% after China tightened down on bitcoin mining in August 2021, with only 25% of bitcoin miners utilizing renewable energy and over 60% depending on coal and natural gas.
With the price of bitcoin declining, there should be less financial motivation to spend electricity mining bitcoin. In principle, this is beneficial to the environment. Surprisingly, the network’s hash rate (and carbon footprint) is still hovering around 200 quintillion hashes per second. Because of the continuous interest, bitcoin mining is likely still lucrative at current pricing. But how long will this last?
Death spirals and tipping points
Bitcoin’s value has previously fallen below the projected cost of production without causing substantial long-term damage to the hash rate. However, if the market remains stagnant for a long time, proof-of-work cryptocurrencies will see an increasing percentage of miners give up.
Miners with the greatest expenses are more likely to sell their bitcoin holdings when profits decline, increasing the market’s selling pressure. Smaller mining operations with high costs that typically employ intermittent renewable energy are prone to short-term capitulation.
However, a domino effect of significant mining operations shutting down one after another may drive crypto prices and network carbon emissions to zero. In crypto-speak, this is known as a bitcoin death spiral.
Aside from price fluctuations in bitcoin mining, there are other possible tipping moments to consider. Many large investors, particularly those who purchased at higher prices, are already sinking, and they owe this to large amounts of bitcoin weighing them down.
El Salvador’s president, Nayib Bukele, is said to have just increased his country’s entire bitcoin reserve to over 2,300, or almost US$72 million at current rates. The loss of his country’s cryptocurrency adds to worries of an impending debt default, which would be devastating to citizens who had no voice in their leader’s risk.
Ban or boycott Bitcoin
Bitcoin bear markets may tire prominent investors. However, research suggests that high-priced cryptocurrencies do more significant environmental damage.
Because mining organizations and crypto developers take advantage of economic instability, weak laws, and the availability of cheap electricity, the damage produced by bitcoin mining disproportionately impacts poor and vulnerable people. Bitcoin miners may price locals out of using these resources for constructive uses. These populations are also on the front lines of the climate problem, which crypto mining exacerbates.
Governments across the globe want to seem enthusiastic about cryptocurrencies as economic growth tools. However, the crash demonstrates that bitcoin is ineffective as a mainstream mode of exchange and a stable store of wealth, causing more suffering than profit for most users.
Following the global financial crisis of 2008-10, governments committed to cracking down on hazardous financial products with fictitious values. Cracking down on cryptocurrency will benefit everyone, including the global climate and the economy. Crypto’s climate contagion will continue to rise if environmental control initiatives are not internationally coordinated or far-reaching enough.