Nick Maughan is an investor and philanthropist – he’s the founder of Capital of Maughan and the Nick Maughan Foundation
Elon Musks final confirmation That Tesla is likely to start accepting Bitcoin payments again is a strong finding that mining activity is showing encouraging signs of a shift towards renewable energy.
After raising concerns about the environmental impact of the cryptocurrency in May, Musk confirmed in a conversation with Jack Dorsey of Twitter and Cathie Wood, CEO of Ark Invest, that both Tesla and SpaceX still have Bitcoin on their balance sheets and that he personally hopes that Bitcoin can overcome the problems that arise from its enormous power consumption.
Accordingly Cambridge Bitcoin Power Consumption Index, Bitcoin mining consumes more than 116 TWh per year, which is an ecological footprint comparable to that of the UAE. This means that despite the increased use of renewable energies, Bitcoin mining still has a long way to go before it can be called “green”.
The reason for Bitcoin mining causes high environmental costs because the process involves solving complex mathematical problems with specialized computer equipment. As more and more bitcoins are mined, these math problems become increasingly difficult to crack. Conversely, computer equipment with higher processing power is needed, and it is not surprising that this computer equipment requires an inordinate amount of power to do more than operate 150 trillion tries to solve the necessary equation every second around the world.
Given the enormous amounts of energy required, miners often move to where electricity is cheapest. For many, this means China: a country that has switched to renewable energy sources but still uses coal two-thirds its stream. With no government agency or organization pursuing Bitcoin mining, it is impossible to know whether the mining is powered by renewable energy sources or harmful fossil fuels.
To make matters worse, Bitcoin’s carbon footprint is only expected to grow exponentially. This is because as the value of the cryptocurrency increases, so does the competition for every bitcoin, which leads to an increase in energy consumption.
Given the environmental cost of Bitcoin, some have turned their backs on cryptocurrency, such as Professor Brian Lucey of Trinity College Dublin, who called Bitcoin ‘dirty currency‘.
Nonetheless, it is becoming increasingly clear that Bitcoin will stay here. With its power to change our world for the better by preventing fraud, providing digital wallets and replacing outdated systems with more efficient ones, Bitcoin could even become the foundation of our financial system in the future. Therefore, it is extremely important that we do not write off the cryptocurrency, but give priority to cooperation in order to make Bitcoin greener.
Fortunately, there are a number of solutions that can help Bitcoin miners reduce their environmental footprint. I propose two starting points.
First, cryptocurrency miners can switch from a “proof-of-work” system to a less energy-intensive “proof-of-state” model. This means that miners can forego the simultaneous operation of a computer network when a transaction takes place. Instead, a “proof-of-state” system assigns coins to users who provide coins as collateral. With far less electricity to mine the currency, this model has been successfully adopted by Cardano, which now claims to be four million times more energy efficient than Bitcoin.
Second, the continued transition to using clean energy sources will play an important role in reducing the environmental impact of Bitcoin mining. Success has already been achieved in Norway and Iceland, where almost 100% all energy production is renewable. As a result, cryptocurrency miners in these countries were able to use cheap hydropower and geothermal energy to power their machines.
For renewable energies to power bitcoin mining around the world, however, green energy sources must be competitively priced. Fortunately, the cost of renewable energy continues to fall. As Don Wyper, COO of DigitalMint explains, “As it stands, the infrastructure that supports the Bitcoin protocol cannot be maintained, but the beauty of the protocol is that the incentive structures will force miners to use the cheapest form of electricity, whatever in the near future the case will be renewable energy ”.
To accelerate the bitcoin mining energy transition, it is important that impact investors like me prioritize renewable energy projects to create incentive structures to encourage more cryptocurrency miners to go green.
Musk’s tentative return to Bitcoin due to its reduced carbon footprint is a welcome sign. However, it is clear that Bitcoin still has a way to go before it can be considered environmentally friendly. To speed up the transition, we need to keep the pressure on.