Bitcoin and other cryptocurrencies were created to be used as digital currency. Rather, they've grown in popularity as speculative investments.
Cryptocurrencies are not just resource expensive and inefficient, but they are also very volatile. Bitcoin and Ethereum, the two most popular cryptocurrencies, have both plunged by over 55 percent in the last six months, prompting some to propose that regulation is needed to calm the market.
Some attribute the falling prices to one specific contagion: TerraUSD, a sinking "stablecoin" that is meant to be tethered to the US dollar. However, the recent bitcoin market fall is most likely the result of a number of causes.
Interest rates have been around zero for years, making bank bonds and Treasury bills seem dull as investments, while cryptocurrencies and digital non-fungible tokens (or NFTs) connected to artwork appear enticing.
The Federal Reserve in the United States and the Bank of England, on the other hand, just raised interest rates by the most since 2000. Markets have also become more alert as a result of ongoing COVID regulations and Russia's invasion of Ukraine.
Although Bitcoin was supposed to be unconcerned by governments and banks, investors are not. They're getting rid of crypto and reducing risk in their portfolios.
Crypto's loss, climate's gain?
Bitcoin, Ethereum, and Dogecoin, the three most polluting "proof-of-work" cryptocurrencies, utilize roughly 300 terawatt-hours (TW/h) of mostly fossil-fueled power per year.
Bitcoin has a carbon footprint of about 114 million tonnes per year. That's about the same as 380,000 space rocket launches or the Czech Republic's yearly carbon impact.
Proof-of-work Mining can be considered a regulated kind of energy waste. The procedure entails expert computers randomly guessing a large string of digits. The network's hash rate represents the amount of processing power allocated to this endeavour.
If the hash rate reduces for any reason, such as power outages or price declines, the guessing game's difficulty is automatically changed to ensure that the network can select a new winner every ten minutes. Each winner is then given the opportunity to verify network transactions and is given 6.25 bitcoins.
The cost of setting up the computers and the energy required to power them determines whether or not the guessing game is profitable.
The majority of the world's proof-of-work mining devices are powered by coal-fired power plants. The greater the price of a cryptocurrency, the more money mining companies are willing to spend on energy until the costs of winning surpass the benefits.
With the price of Bitcoin declining, there should be less financial motivation to spend electricity mining Bitcoin. In principle, this is beneficial to the environment.
Surprisingly, the network's hash rate (and carbon footprint) is still hovering 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 previously fallen below the projected cost of production without causing substantial long-term damage to the hash rate. However, if the market remains stagnant for a long time, proof-of-work cryptocurrencies will see an increasing percentage of miners give up.
Miners with the greatest expenses are more likely to sell their bitcoin holdings when profits decline, adding to the market's selling pressure. Smaller mining operations with high expenses (typically employing intermittent renewable energy) are prone to short-term capitulation.
However, a domino effect of significant mining operations shutting down one after the other may drive crypto prices and network carbon emissions to zero. In crypto-speak, this is known as a Bitcoin death spiral.
Apart from price fluctuations in Bitcoin mining, there are other potential tipping moments to consider. Many large investors, particularly those who purchased in at higher prices, are already underwater, owing to large amounts of Bitcoin.
El Salvador's president, Nayib Bukele, is said to have just increased his country's entire Bitcoin reserve to over 2,300, or around US$72 million at current rates. The loss of his country's crypto assets is fueling worries of an impending debt default, which would be devastating to individuals who had no voice in their leader's risk.
Bitcoin ban or boycott
Bitcoin bear markets could tire prominent investors. However, evidence suggests that high-priced cryptocurrencies do significantly greater environmental harm.
As mining operations and crypto developers take advantage of economic instability, weak laws, and availability to cheap electricity, the damage produced by Bitcoin mining disproportionately impacts poor and vulnerable people.
Bitcoin miners may put locals out of business who wish to utilise these resources for useful purposes. These communities are also at the forefront of the climate issue, which is exacerbated by crypto mining.
Governments throughout the world want to seem enthusiastic about cryptocurrencies as economic growth tools. However, the crash demonstrates that Bitcoin is both ineffective as a mainstream method of trade and a stable store of value, causing considerably more suffering than profit for most users.
Following the global financial crisis of 2008-10, governments committed to crack down on hazardous financial products with inflated prices.
Cracking down on crypto now will benefit everyone, including the global climate and the economy.
Crypto's climate contagion will develop if environmental control initiatives are not internationally coordinated or far-reaching enough.
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