Why everyone from Elon Musk to Janet Yellen is concerned about Bitcoin’s energy consumption

Elon Musk’s decision to prevent Tesla from accepting Bitcoin as a form of payment has prompted a re-examination of the cryptocurrency’s environmental impact.

Musk said Wednesday that Tesla stopped buying its Bitcoin vehicles due to concerns about the “rapidly increasing use of fossil fuels to mine Bitcoin”.

He alluded to data from researchers at Cambridge University showing that Bitcoin’s power consumption will soar this year.

Tesla will not sell its Bitcoin – the automaker sits on top of the $ 2.5 billion digital coin – and Musk said he intends to resume transactions in Bitcoin once “transitions to more sustainable energy” are degraded.

“We’re also looking at other cryptocurrencies that use <1% of Bitcoin's energy / transaction," he said.

Musk’s comments have shaken cryptocurrency markets, which have lost up to $ 365.85 billion in value since his tweet.

Why is Musk worried?

Bitcoin critics have long been concerned about its environmental impact. According to the Cambridge Bitcoin Electricity Consumption Index, the cryptocurrency consumes more energy than entire countries such as Sweden and Malaysia.

To understand why Bitcoin is so energy intensive, you need to look at its underlying technology, the blockchain.

Bitcoin’s public ledger is decentralized, which means it is not controlled by a single agency. It is constantly updated from a network of computers around the world.

So-called miners operate specially designed computers to solve complex mathematical puzzles and carry out a transaction. This is the only way to mint new bitcoins.

Miners do not do this for free. You have to pay huge sums of money for special equipment. A key incentive to the Bitcoin model, known as the “Proof of Work”, is the promise to be rewarded with some Bitcoin if you manage to solve the complex hashing algorithm.

It’s worth noting that Dogecoin, whose price has risen sharply recently due to Musk’s support, also uses a proof-of-work mechanism.

Carol Alexander, a professor at the University of Sussex Business School, explains that the “difficulty” of mining bitcoin – a measure of the computational effort required to mine the cryptocurrency – has “increased” over the past three years.

“More and more electricity is being used,” Alexander told CNBC. “That means network difficulties will also increase (and) more miners will join as the hash rate increases.”

Bitcoin’s price has risen nearly 70% so far this year. As the price goes up, so does the revenue for miners, encouraging more participants to mine the cryptocurrency.

Meanwhile, Musk isn’t the only one concerned about Bitcoin’s environmental impact. In February Treasury Secretary Janet Yellen warned that the digital coin was “extremely inefficient” for transactions and consumed an “astounding” amount of energy.

Is Bitcoin Really Harming the Environment?

It’s complicated. On the one hand, the Bitcoin network consumes an unfathomable amount of energy. Much of the bitcoin mining is concentrated in China, whose economy is still heavily dependent on coal.

A coal mine in the Xinjiang area was flooded and shut down last month. According to the crypto industry publication, CoinDesk, almost a quarter of the Bitcoin hash rate – or processing power – was offline.

In March, the Inner Mongolia region of China announced it would stop mining cryptocurrencies in the region due to concerns about energy consumption.

On the other side of the debate, Bitcoin investors have tried to push back the narrative that it is polluting.

While it is difficult to pinpoint the energy mix that powers Bitcoin, some in the crypto industry say that miners are incentivized to use renewable energies as it becomes cheaper to produce. In China, Sichuan Province is known to attract miners because of its cheap electricity and rich hydropower resources.

Last month, Jack Dorsey’s fintech firm Square and Cathie Woods Ark Invest released a memo claiming that Bitcoin will indeed drive innovation in renewable energy. However, critics said they had a vested interest in it.

Alexander said the debate about Bitcoin’s environmental impact is misguided as most of the transactions involving the digital asset do not take place on the blockchain.

“Almost all trade is not done on the blockchain,” she said. “It’s done on secondary markets and centralized exchanges. They aren’t even recorded on the blockchain.”

ESG concerns

Whether or not Bitcoin is actually a polluter, the negative connotations regarding its energy use have worried investors becoming aware of the ethical and environmental responsibilities of companies.

ESG, or environmental, social and corporate governance, has become a growing trend in financial markets with portfolio managers increasingly incorporating sustainable investments into their strategies.

Some Tesla shareholders may be concerned that the company is betting heavily on Bitcoin while claiming to be a green energy company.

“Bitcoin supporters will wonder where this will leave the future of cryptocurrency,” Laith Khalaf, a financial analyst at investment firm AJ Bell, said in a note Thursday.

“Environmental issues are an incredibly sensitive issue right now, and Tesla’s move could serve as a wake-up call for businesses and consumers using Bitcoin that had previously ignored its carbon footprint,” added Khalaf.

“Tesla’s decision is certainly putting pressure on other large companies accepting Bitcoin to review their practices, as boardrooms will now be cautious about ESG investors listing this on their shareholders’ register.”

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