Assessing the Environmental and Social Impact of Cryptocurrency

Fay Sui

Introduction

To some people, cryptocurrency represents a significant evolution in the industry of financial transactions, developing a new method different from traditional banking. In 2009, the first introduced decentralized cryptocurrency, Bitcoin, was created by an individual or group of individuals using the pseudonym Satoshi Nakamoto (Nakamoto, 2008). Since then, cryptocurrencies gradually acquired public attention except one thing, its environmental and social impact. Since the implementation of these technologies would significantly change environmental sustainability, it is crucial to study those impacts. The biggest concern is that cryptocurrencies, particularly those that are energy intensive, is consuming large amounts of electricity, often powered from non renewable energies, leading to substantial carbon emissions. However, this impacts has not acquired significant public awareness regarding the long term sustainability and some potential ethical implications. Therefore, this study aims to assess the environmental impact of cryptocurrencies based on current studies.

Background

Cryptocurrencies are based on the so called blockchain technology, which is like a digital record book spread across many computers. There is no ruling authority to control others, making it really hard to change any information without every participants agreeing. Since the record is kept simultaneously by many parties, it is regarded as safe and secure by many investors. However, it is important to note that while it is admired for its security and transparency, it is also a safe haven for some illicit activities, including money laundering.

The act of updating this record with new transactions is called mining. It’s a tough job that requires solving complex math problems by some computing hardware. Miners are rewarded with new cryptocurrency, thus encouraging them to keep mining for more. The mining process can vary significantly between different types of cryptocurrencies, but there are two main types: proof-of-work (PoW) like Bitcoin and proof-of-stake (PoS) like Ethereum. Usually, when we are talking about the energy consumptions of crypto, we are mainly talking about the PoW cryptos, because the system requires substantial computational power and energy. In contrast, a PoS system, allows coin holders to validate transactions based on the number of coins they hold, instead of solving the challenges. However, just because of the more intense energy consumption from PoW system, we are able to estimate their impacts more precisely than the PoS algorithms.

Impact

The environmental impact can be divided into two categories: indirect impacts, such as electronic waste from mining hardware, and direct impacts, such as energy consumption.

Direct Environmental Impact

Several authors have already estimated the direct environmental impact based on different methods. One of the studies based on cost benefit analysis showed that by 2028, the amount of cryptocurrency market value needed to support economic activities would expand from current $240 billion to a range between $2.4 trillion to $2.9 trillion, assuming +36% CAGR and 2018 annual yield was estimated at around $260 billion, ranging between $236 billion to $289 billion. The rising electricity requirements to produce cryptocurrency could lead to energy consumption ranging between 196TWh to 390TWh, with likely case illustrated at 293TWh. This energy consumption level would generate energy costs ranging between $23 to $57 billion per year when considering lower and upper bound projections (Martynov, 2020). A more recent study also suggests that the annual energy expenditure will peak at 269.59TWh/year in 2024, imposing a severe amount of pressure on resources (Tayebi & Amini, 2024). On top of energy consumption, water and carbon footprint are another concern.

In addition to energy consumption, water usage and carbon footprint are also significant concerns. The process of mining cryptocurrencies not only requires vast amounts of electricity but also leads to substantial water consumption, particularly in cooling systems for mining hardware. Furthermore, the carbon footprint associated with the energy sources used in mining operations, especially those reliant on fossil fuels, contributes to greenhouse gas emissions and climate change. These environmental impacts highlight the need for more sustainable practices and alternative consensus mechanisms in the cryptocurrency industry. In terms of its water footprint, cryptocurrencies have an annual water consumption of 3668 × 106 $m^3$, which is more than double that of conventional currencies (Siddik et al., 2023). Crypto mining activities are estimated to be responsible for emissions of 139 million tons of CO2-eq, with carbon emissions specifically ranging between 53 to 63.6 million metric tons of CO2 (Tayebi & Amini, 2024).

Figure: Comparison of electricity use, water footprint, and carbon footprint of conventional transaction systems and cryptocurrencies at the country level. The six panels show the (A) electricity use of conventional currencies, (B) electricity use of cryptocurrencies, © water footprint of conventional currencies, (D) water footprint of cryptocurrencies, (E) carbon footprint of conventional currencies, and (F) carbon footprint of cryptocurrencies (Siddik et al., 2023).

Indirect Environmental Impact

While on the other hand, the indirect environmental impacts of cryptocurrency mining extend beyond energy consumption and emissions, with electronic waste (e-waste) being a significant concern. Mining operations require specialized hardware such as ASICs (Application-Specific Integrated Circuits) and GPUs (Graphics Processing Units), which are crucial for efficiently processing cryptocurrency transactions. The indirect environmental impact would be hard to quantify precisely, but it encompasses several significant factors. The manufacturing process for these mining devices involves the extraction and processing of raw materials, which further strains natural resources and ecosystems. Before China’s ban on cryptocurrency mining in 2021, the share of renewable electricity seasonally exceeded 50% of the consumption of the Bitcoin network (De Vries et al., 2022). Therefore, this shifts environmental costs from the computation phase of cryptocurrency mining to the production phase of mining equipment for almost all environmental impact categories, resulting that production is responsible for 30% to 70% of mineral resource scarcity due to production plus use phases (Courtillat-Piazza et al., 2024). Moreover, once these devices approach the end of their lifecycle, they become electronic waste after their use for mining. De Vries and Stoll (2021) estimated annualized 30,700 metric tons of e-waste or 272 g of waste per crypto transaction.

Human Health

Some further studies also suggest that cryptocurrencies may have adverse effects on human health, as increased levels of greenhouse gases, such as CO2, associated with cryptocurrency mining, directly impact health by reducing air quality, thereby raising the risk of morbidity and mortality. In the very first study to describe the externalities attributed with mining a single coin in the US and in China, it indicated that in 2018, for every $1 of Bitcoin value that was mined, it had health and climate repercussions equating to $0.49 in the US and $0.37 of that in China (Goodkind et al., 2020). Essentially, nearly half of the financial value generated by each US dollar from Bitcoin production was offset by the damages it simultaneously caused.

In response to growing environmental concerns, several innovative practices have emerged within the cryptocurrency sector aimed at reducing its ecological footprint. One notable initiative is the shift toward renewable energy sources for mining operations. For example, some companies have set up mining farms near renewable energy plants, such as geothermal energy facilities in Iceland and hydroelectric power plants in Canada, leveraging the abundant, clean energy available in these regions. Another innovative approach is the development of more energy-efficient blockchain technologies, such as the transition from PoW to PoS algorithms. There are already over 350 cryptocurrencies that have fully or partially abandoned the energy-intensive and hardware-hungry PoW for more sustainable alternatives, such as the PoS consensus mechanism (Tayebi & Amini, 2024).

Criticism

Besides the concerns about energy consumption, another issue is its volatility. In economics, we all know that the currency of a nation is backed and secured by its government. The more stable its economy is, the more stable its currency value is. Unlike the sovereign currencies, most cryptocurrencies have no underlying assets to back them up, all they have is the investors believes about their future profitability. There are many cases where a complete outsider, induced by the outlook of investing in cryptocurrencies, went to bankruptcy or even committed suicide as their portfolio value plummeted along with the cryptos. Lastly, cryptocurrencies also provided a safe transaction method for illegal activities, for instance, blackmail, ransomware attacks, and the purchase of illegal goods. It is extremely hard for the global community to find effective ways to regulate and monitor those transactions to prevent their misuse, while still preserving the benefits of the technology.

Conclusion

This study investigated the environmental and social impact of cryptocurrencies, revealing significant challenges as well as potential improvements toward sustainability. We found that the electricity consumption associated with cryptocurrency mining is astonishing, since they often rely on non renewable resources that contribute to high carbon emissions. Those electricity consumption may even be greater than that of a country like Sweden or Ukraine in a year. It also has huge impact on the water and carbon footprint. Additionally, the electronic waste coming from outdated mining hardware is also a concern for pollution. Lastly, it has been linked to various health concerns among other issues. However, the adoption of renewable energy sources and more energy efficient algorithms like PoS, are promising developments. And there are some new authorities implementations that may aim to help regulating cryptocurrency transactions.

In conclusion, while the environmental and social impact of cryptocurrencies is currently significant, there is potential for improvement. It is essential to balance the environmental and social impacts of cryptocurrencies with its potential benefits if under some consensus and regulations.

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