There has been a LOT of press recently, especially in the United States, relating to the environmental impact of Cryptocurrency mining and even the Oracle of all things Crypto, the self-professed “technoking” Elon Musk has spoken out AGAINST Bitcoin and the damage being caused to the planet through mining efforts. “Bitcoin mining rewards the most energy efficient miners with the most profit”. Before we look at that, we should really understand how crypto is created. Proof of Work vs Proof of Stake At the heart of every cryptocurrency lies a network of computers that helps secure the software from attackers and regulates the issuance of new units of its supply. This system is called a consensus mechanism. The two most widely used consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS), and they both regulate the process in which transactions between users are verified and added to a blockchain’s public ledger, all without a central party’s help. “Proof of Work (POW) requires huge amounts of energy, with miners needing to sell their coins to ultimately foot the bill; Proof of Stake (PoS) gives mining power based on the percentage of coins held by a miner.” Curious to understand the in-depth difference between them? Read on… Proof of Work (PoW) was actually introduced as a concept in the early 1990s as a means to mitigate email spam! The idea was that computers would be required to perform a small amount of work before sending an email. This work would be trivial for someone sending a legitimate email, but it would require a lot of computing power and resources for users to send mass emails. However, it was Satoshi Nakamoto, Bitcoin’s infamous and slightly mysterious creator, who first applied the technology for use in a digital ‘money’ system in Bitcoin’s whitepaper. A blockchain is a mechanism that consists of a string of blocks (groups of transactions) aligned in chronological order based on the order of transactions. PoW algorithms determine who can adjust the ledger through a competitive race in which participants (the miners!) are encouraged to expend computational energy in order to propose valid blocks that meet the rules of the network. Nodes (any computer running the Bitcoin software) then validate transactions, prevent double spending and determine whether proposed blocks should be added to the chain. The block reward refers to new cryptocurrency awarded by the blockchain to the miner for each block that is deemed valid and accepted by the network. In the case of certain cryptocurrencies, like Bitcoin, the block reward is reduced after a certain number of blocks have been found. This is done to keep the total money supply finite and deflationary. Proof of Stake (PoS) is a modification of PoW introduced in 2012 as a means to solve its perceived dependency on energy consumption as a means to determine blockchain ordering. Rather than rely on computers racing to generate the appropriate hash, the idea behind a PoS protocol is that participation is determined by ownership of a digital currency’s supply. Using a set of factors determined by the protocol, the PoS algorithm pseudo-randomly elects a node (anyone who owns the coin) to propose the next block to the blockchain. When a node gets elected, its role is to verify the validity of the transactions within the block, sign it and propose the block to the network for validation. Of note, in PoS cryptocurrencies, there is no competition for who is selected to add blocks. As such, the blocks are often said to be ‘forged’, or ‘minted’ rather than mined. Unlike PoW blockchains, PoS blockchains do not determine who can propose blocks based on energy consumption. Proponents claim PoS as a “more efficient” system, but, PoS blockchains also require the use of specialized hardware (GPUs) that, like PoW mining equipment (ASICs) and other computing devices, require resources to produce and PoS miners must also maintain active internet connections, which requires energy expense. Users who want the opportunity to be selected to add blocks to a PoS blockchain are required to stake, or lock, a certain amount of the blockchain’s cryptocurrency in a special contract. The amount of coins staked determines their chances to be selected as the next block producer, however, in order to not ALWAYS favour the wealthiest nodes, PoS may involve other determining factors. These may include the amount of time a node has staked their coins, as well as pure randomisation. Similar to the PoW algorithm, the block reward in PoS refers to cryptocurrency awarded by the blockchain to the user who proposes a valid block. However, as block selection is done by coin ownership, exchanges may offer staking services that offer users the ability to stake funds on their behalf in exchange for more regular payouts. Energy Usage So.. back to our original point.. How much energy do Bitcoin and Ethereum consume? We’ll give the bottom line first: reasonable estimates from the University of Cambridge place Bitcoin’s current annual energy consumption at 130TWh, a continuous draw of 15 gigawatts of electricity. If Bitcoin were a country, its annual energy consumption would place it between the mid-sized countries of Ukraine and Argentina. Some estimates of Ethereum’s annual energy consumption place it at around 26TWh, a draw of 3 gigawatts, comparable to Ecuador, a country of 17 million people. Elon Tesla chief, our favourite “technoking”, Elon Musk has agreed with Twitter boss Jack Dorsey, who has said that bitcoin “incentivises” renewable energy, despite experts warning otherwise. The cyrptocurrency’s carbon footprint is larger than many countries, but Mr Dorsey claims that could change if Bitcoin miners worked hand-in-hand with renewable energy firms. One expert said it was a “cynical attempt to greenwash” Bitcoin. China, where more than two-thirds of power is created from coal burning power plants, accounts for more than 75% of Bitcoin mining globally. In a tweet on Wednesday, Mr Dorsey said that “Bitcoin incentivises renewable energy”, to which Mr Musk replied “True”. The tweet comes soon after the release of a White Paper from Mr Dorsey’s digital payment services firm Square, and global asset management business ARK Invest. Entitled “Bitcoin as key to an abundant, clean energy future”, the paper argues that “Bitcoin miners are unique energy buyers”, because they offer flexibility, pay in a cryptocurrency, and can be based anywhere with an internet connection. “By combining miners with renewables and storage projects, we believe it could improve the returns for project investors and developers, moving more solar and wind projects into profitable territory,” it said. Author and Bitcoin critic David Gerard described the paper as a “cynical exercise in Bitcoin greenwashing”. “The reality is: Bitcoin runs on coal,” he told the BBC. He gave the example of how an accident at a coal mine in Xinjiang meant it had to temporarily close, causing power cuts across the area and crippling the ability to mine new Bitcoins. “This slowed the blockchain down considerably… and coincided with the recent Bitcoin price drop,” he said. “Bitcoin mining is so ghastly and egregious that the number one job of Bitcoin promoters is to make excuses for it — any excuse at all.” China v Iceland A recent study suggested that the amount of Bitcoin mining happening in China could actually threaten the country’s emission reductions targets. (which most environmentalists already say are too little and too late) But there are some cryptocurrency miners based in countries such as Iceland and Norway, where most energy production is almost 100% renewable, via hydro-electricity and geothermal energy. Writing in Medium, Bitcoin expert Phil Geiger pointed out that “Bitcoin mining rewards the most energy efficient miners with the most profit”. “Mining is about maximising the number of hashes per kW of electricity,” he wrote. “Currently, the most efficient way to generate the highest hashes/k is through the use of solar energy and hydro-electric, because those are the cheapest ways to produce electricity.” Back in February, Bitcoin prices leapt when Musk revealed that the company had bought US$1.5 billion worth of the cryptocurrency. And recently Bitcoin has tumbled after yet another tweet, this time revealing that Tesla will no longer accept Bitcoin for purchases of electric cars. “We are concerned about rapidly increasing use of fossil fuels for bitcoin mining and transactions, especially coal,” Musk said. Activists and journalists alike have, of course, been highlighting this issue for months. Two striking statistics encapsulate the problem. Firstly, as we discussed, the majority of Bitcoin mining has happened in China, driven by coal fired power stations and Alex Lipton, another crypto expert, also noted in a recent interview that Bitcoin prices move whenever accidents occur in Chinese coal mines. Second, the US$2 trillion crypto market has expanded so fast that it is gobbling up vast quantities of energy. Bitcoin enthusiasts such as the entrepreneur Anthony Scaramucci point out that statistics need context and that traditional finance is energy-intensive too and so are other types of technology. As a paper co-authored by a former researcher from Google’s artificial intelligence ethics unit notes, some of the AI processes behind Google search are “estimated to require as much energy as a trans-American flight”. Even with such caveats, the fact is Bitcoin’s carbon footprint is embarrassing, not just for Tesla but for millennial crypto investors who care about green issues. And that in turn highlights three big lessons for all investors. First, nobody can afford to ignore environmental, social and governance concerns today, even in stocks labelled as ESG. Tesla is featured in many ESG funds because investors have focused on the electric car point and ignored other issues. However, digital transparency is now enabling activists to monitor companies’ activities more effectively than ever before. This means that investors need lateral vision when they value companies, since ESG risks are rarely static or binary and often involve trade-offs that constantly shift. Secondly, investors need to watch the debate around tech’s carbon footprint as an example of this shifting landscape. A scramble is under way to tackle bitcoin’s carbon issues. The Rocky Mountain Institute, a clean energy non-profit, recently joined forces with UN officials and fintech leaders to explore solutions. One might entail changes to the computing processes around crypto to cut energy consumption; recently a “green” cryptocurrency which uses less processing power called Chia was launched. Another option is to use green electricity sources, for instance by switching from coal to Icelandic hydroelectric power. Enthusiasts such as Scaramucci think this could solve the issue if there is a registry that enables investors to track the provenance of bitcoins. Which idea might work is unclear. But the debate probably explains why Musk dispatched his tweet. The third point is about regulation. The reason Musk can act like the Wizard of Oz of crypto, with impunity, is that the sector is opaque and largely unregulated. Financial policymakers are now threatening a crackdown. Quite frankly, one that is probably needed and will in many ways help the market as a whole. But we are not there yet, as a report from the Bank for International Settlements notes, “the vast majority of jurisdictions in the world” have not implemented controls to stop money laundering, let alone market manipulation. Plus there is “significant variability in the definition of the regulatory perimeter across jurisdictions”. In plain English, oversight is a mess. Libertarians like it this way. So might Musk. But if crypto is going to become more mainstream — with whatever token — it badly needs more accountability and transparency. Maybe that will be impossible to achieve given crypto’s anti-establishment origins, that’s a debate we can all engage in! Well, the fight over green standards might, just possibly, start this process by providing a cause for young crypto-enthusiasts to rally around. And, that could turn out to be the most consequential impact of Musk’s tweet and a reason for investors and regulators to conduct some belated scrutiny of the industry as a whole and the Chinese mines, both of the coal and computing variety.