Crypto mining and the energy sector

Who would ever have thought that the arrival of cryptocurrency would lead to major controversy over not only the nature of the currency itself but also the energy used to create and maintain it?

Bitcoin is probably the most widely known cryptocurrency and first came to public attention in 2009. It has since been joined by thousands of other cryptocurrencies, among them such names as Ethereum, Dogecoin, Cardano and Litecoin. Even today, they represent collectively only about 0.2% of the world’s financial assets, but nevertheless their energy demands and carbon footprint have raised serious concerns in some quarters.

Unlike traditional currencies, which are backed by central banks and managed through the financial system, digital currencies are exchanged via 'peer-to-peer' transactions, with no banks or other institutions involved. Every transaction is recorded on a vast database, known as a blockchain. The lack of a centralised, trusted authority means that blockchain needs a consensus mechanism to ensure trust across the network. Each transaction made is represented by a ‘block’ which is added to the larger chain, hence the name blockchain, and all the transactions remain in the blockchain forever.

How crypto mining works

You can buy and sell cryptocurrencies, but you can also acquire them through a process known as mining, in which computers on the network compete with each other to solve a complex mathematical problem. The most popular method is known as Proof-of-Work (PoW), in which the computers can add transactions to the blockchain and check their validity. PoW acts as the consensus mechanism. Each guess a miner makes at the solution is known as a ‘hash’ and the number of guesses taken by the miner every second is known as the ‘hashrate’. The Bitcoin system sets a target rate of solving one block every 10 minutes. Once the puzzle is solved, the latest block of transactions is approved and added to the chain of transactions. The first miner to solve the puzzle is rewarded with new Bitcoins.

In the early days of crypto, people used regular central processing units to mine bitcoin. As the complexity of the mathematical puzzles and the number of miners increased, people started using more powerful graphics processing units (GPUs). Then they moved on to even more powerful field-programmable gate array (FPGA) hardware, and by 2012, to application-specific integrated circuits (ASICs). ASICs are purpose-built chips, infinitely more powerful and more energy efficient than the CPUs used in 2009.

ASICs may be more energy efficient, but crypto mining has nevertheless in some cases had a negative impact on local energy supply. It's hard to establish exactly how much energy is used in crypto, and estimates vary significantly. One of the most widely accepted estimates comes from the University of Cambridge Centre for Alternative Finance (CCAF), which studies cryptocurrencies. It estimated in March 2023 that Bitcoin's total energy consumption could be between 62 and 209 terawatt hours (TWh) a year, with a central estimate of about 128 TWh.

To give that some perspective, one terawatt-hour is equal to one trillion watt-hours and is the amount of power generated by a one terawatt generator running for one hour. To give meaningful examples, 62 TWh a year is about the same as Algeria’s entire electricity consumption, while 209 TWh is the equivalent of South Africa’s. The central estimate of 128 TWh is comparable to the annual electricity consumption of individual countries such as Norway, Sweden, Argentina and Ukraine, or approximately 0.5% of total global energy consumption.

Where and how crypto mining is carried out is a key determinant of its impact on climate change. China used to account for between 60% and 70% of mined bitcoin, which meant that the lion’s share of electricity used in crypto mining came from coal. However, China banned the practice in 2021, citing concerns about fraud, the need for economic stability, and impact on its climate targets.

Today the USA is the largest single producer of Bitcoin, followed by Kazakhstan, which gets about half its energy from high-emission, coal-powered plants. Bitcoin accounts for around 40% of the global crypto market and so much of the available data, such as it is, relates to Bitcoin specifically. Bitcoin’s annual carbon footprint has been estimated by Columbia University’s Columbia Climate School at 65 megatons, while other estimates put it much lower at 10‑20 Mt CO2 per year, or 0.03-0.06% of global energy-related CO2 emissions. The lack of accurate, agreed-upon data makes the business of understanding and reconciling crypto mining and the environment – almost literally – a minefield.

The case for greener crypto mining

There are many who argue that crypto mining can actually help local utilities with distribution management. Because crypto miners can relocate with relative ease, a utility can place a mining operation where it benefits the system most, by absorbing excess power and enabling the grid to operate more smoothly. In theory, crypto miners can operate flexibly, taking advantage of opportunities to buy cheaper power at periods of low demand, and can even set up on site within a power plant and thus avoid grid costs. That could help the power generators, too, providing outlets for any under-used generating capacity. Where energy storage is an issue, for say solar and wind generation sites, crypto miners could provide a convenient revenue source if they are willing to work closely with the utility. In hot climates, flexible tariffs that reflect seasonal needs for air-conditioning and water desalination can also be factored into the mix.

So, although cryptocurrencies don’t give any sign of achieving dominance, neither do they show any imminent sign of going away. While the power needs of the relatively new crypto mining market may seem to present big problems for some, they can also represent opportunity. It all depends on whose data you feel able to trust.