Cryptocurrencies like Bitcoin were meant to be used as digital cash. Instead, they’ve become popular as speculative investments. As well as being resource-intensive and inherently wasteful, cryptocurrencies are also incredibly volatile. The prices for the largest cryptocurrencies, Bitcoin, and Ethereum, have dropped by over 55% in six months, leading some to suggest that regulation is needed to contain the turmoil.
Some blame sliding prices on one specific contagion, a collapsing “stablecoin” called TerraUSD, which is supposed to be pegged to the US dollar. But the current cryptocurrency market crash is more likely a combination of many factors.
For years, interest rates have been close to zero, making bank bonds and treasury bills look boring as investments. At the same time, cryptocurrencies and digital non-fungible tokens (or NFTs) linked to artwork look appealing. However, the US Federal Reserve and the Bank of England recently increased interest rates significantly since 2000.
Continuing COVID controls and Russia’s invasion of Ukraine have also sobered up the markets. Bitcoin was designed to be indifferent towards governments and banks, but investors generally aren’t. They’re cutting sources of risk from their portfolios and dumping crypto.
Crypto’s loss, climate’s gain?
Bitcoin (a “proof-of-work” cryptocurrency) uses roughly 118.47 terawatt-hours (TWh) of electricity over a year – more than all the domestic refrigerators in the US combined.
Proof-of-work mining can be thought of as a controlled way of wasting energy. The process involves specialist computers repeatedly taking random shots at guessing a long string of digits. The amount of computing power dedicated to this effort is the network’s hash rate.
Suppose the hash rate drops for any reason, because of power cuts or price dips, for example. In that case, the difficulty of the guessing game is automatically adjusted to ensure the network can find a new winner every ten minutes. Each winner then gets a go at verifying transactions online and is awarded 6.25 newly minted Bitcoins.
Whether the guessing game is profitable depends on how much the mining outfit has paid to set up their computers and for the energy to run them. Recent research indicates that when China cracked down on bitcoin mining in August 2021, bitcoin’s carbon intensity increased by around 17%, with only 25% of bitcoin miners using renewable energy and over 60% relying on coal and natural gas. Estimates vary, however. A survey by the Bitcoin Mining Council (an industry body) of roughly half of all miners in the first quarter of 2022 claimed total renewable energy use (including nuclear) was 58%.
The higher the cryptocurrency price, the more cash mining outfits are prepared to waste on this electricity until the costs of winning outweigh the rewards. With the bitcoin price falling, the financial incentive to waste energy for mining bitcoin should be lower. In theory, that’s good for the climate.
But, surprisingly, the network’s hash rate (and carbon footprint) remains very close to its all-time high, averaging around 200 quintillion hashes per second. The scale of this continued interest means bitcoin mining at current prices is probably still profitable. But for how long?
Tipping points and death spirals
Bitcoin’s value has dropped below the estimated cost of production several times before without significant long-term damage to the hash rate. But should the market stagnate for long enough, proof-of-work cryptocurrencies will start to see an increasing number of miners capitulate.
Miners with the highest costs will likely sell off their Bitcoin holdings as profitability drops, creating even more selling pressure in the market. Short-term capitulation among smaller mining outfits with high costs (often using intermittent renewable energy) is standard.
But a domino effect with significant mining firms closing down one after another could cause crypto prices and the network’s carbon emissions to drop rapidly towards zero. This event is called a Bitcoin death spiral in crypto-speak.
Besides bitcoin mining price predicaments, there are other potential tipping points to consider. Many big investors, especially those who bought in at higher prices, are currently underwater — weighed down with big bags of Bitcoin.
Bitcoin ban or boycott
In the past, mining outfits and crypto developers have taken advantage of economic instability, weak regulations, and access to cheap energy. Bitcoin miners can price out locals wanting to use these resources for productive purposes. These communities also tend to face the sharp end of the climate crisis: crypto-mining fuels.
Governments worldwide want to appear keen on cryptocurrencies as tools for economic growth. But the crash shows that Bitcoin is useless as a mainstream means of exchange and a reliable store of value.
After the 2008-10 global financial crisis, governments promised a crackdown on toxic financial instruments with make-believe valuations. For the global climate and a stable economy, cracking down now on crypto is a good idea. But if environmental regulation efforts are not globally coordinated or far-reaching enough, crypto’s climate contagion could continue to grow.