As the cryptocurrency and web3 market (DAOs, NFTs, etc.) have been booming in the past couple of years, it becomes vital for us to look at both the advantages and ways to improve the underlying technology. In this post, we look at the energy consumption of cryptocurrencies compared to traditional banks.
This article was originally published in 2021 and has been republished with some edits and updates to make it more relevant and updated.
What is cryptocurrency?
It is almost impossible to be unfamiliar with cryptocurrency in this day and age. It is a form of digital money where transactions are run using a cryptography system and stored in a computer database or a blockchain rather than a central authority.
Cryptocurrencies such as Bitcoin, Ethereum, and Tether are increasingly getting known and used by people and companies worldwide. Some use it to invest, and some even use it as their source of income.
For many years since its inception, major corporations and banks have downplayed the value of cryptocurrencies.
However, in early 2021, major corporations like Tesla have announced that people could buy their cars using Bitcoin. They have also invested $1.5 billion in Bitcoin at the same time. Since then, they stopped accepting bitcoin for an indefinite period owing to sustainability issues and also sold a bit of their Bitcoin portfolio at a high. Many other businesses have decided to accept Bitcoin in recent years, such as Starbucks and Etsy.
This can be attributed to the significant surge that happened in the crypto market in 2021.
It has become a new system of banking that requires no real-life transaction activities such as ATMs or branches. It is not run by a central authority, meaning no one is in charge and transactions cannot be traced or deleted.
As it is accepted more widely now, the sustainability aspect of this technology comes under scrutiny. How much energy does cryptocurrency consume, and is this modern way of banking worth it?
Crypto Energy Consumption
Cryptocurrency works through a process called crypto mining. It is a process of solving a computational puzzle and storing the transactions into a blockchain.
This process requires significant computing power, which also consumes a lot of energy from electricity and other energy sources such as coal and gas.
Besides the actual mining part, the maintenance and security aspect of crypto also involves a lot of energy.
Research has found that bitcoin miners alone consume approximately between 60 to 125 TWh of energy annually, which is equivalent to around 0.6% of global electricity and ties the energy consumption of some countries such as Austria (75 GWh) and Norway (125 GWh).
Adding the other numerous cryptocurrencies out there, we can roughly estimate that the cryptocurrency industry consumes substantial energy.
Some cryptocurrencies require more computing power than others, differentiated by the number of users and the difficulty of the ‘puzzle’ that needs to be solved.
As puzzle difficulty increases, energy consumption will also increase. This makes cryptocurrency bad for long-term sustainability as energy consumed has to keep up with the increasing computing power required, maintaining the solving processes, and security as users also grow in numbers.
Last year, more than 200 companies and individuals launched the Crypto Climate Accord, which aims to decarbonize the global crypto industry and its transition to net-zero greenhouse gas emissions by 2040, mainly by switching to renewable power sources.
Cryptocurrency is a relatively new industry and is still being developed, so more future energy-saving technology, algorithms, and innovations are expected.
For example, a new version of Ethereum (called Ethereum 2.0), which is at work, will use 99.95% less energy when it is ready to be used. However, the switchover is still some years away.
Up to 70% of bitcoin miners use renewable energy as their power supply, such as wind, solar, and hydropower.
Traditional Banking Energy Consumption
Like cryptocurrency, traditional banks also consume energy to run their virtual and physical transactions.
The virtual transactions include the central server and digital security. Whereas the physical transactions involve branches, ATMs; also consider the requirements for each branch, for example, air conditioning, employee, computers, etc.
Additionally, traditional banks also use physical currencies such as coins and bills. Many resources are required besides energy, such as metals, ink, cotton, etc.
Traditional banks' total annual energy consumption of traditional banks is around 26 TWh on running servers, 26 TWh on ATMs, and 87 TWh from an estimate of 600k+ branches worldwide.
It is no surprise that traditional banks consume much energy as we can assume that 70% of the world population (adults) utilizes them.
Which one is better?
Although cryptocurrency consumes a lot of energy, it has already included the whole currency system with no added real-life energy consumption from physical branches, buildings, bills, and even human resources.
However, it can only process a few transactions at a time. One transaction alone requires great computing power, especially NFTs, even utilizing the total electrical energy to power an average household for weeks.
On the other hand, traditional banks require huge energy consumption for both their virtual and physical aspects, but they can process thousands of transactions at a time.
Both crypto and traditional currency have unconsciously become a necessity to the world. It eases many aspects and assists almost every activity and people on earth.
It is clear that the currency industry will consume a substantial amount of energy. Thus, answering the question of which method is more sustainable is still unclear.
However, the evaluation of sustainability should also consider the vast opportunities offered by both currency methods.
The best solution is to continue innovating and developing these technologies to be more sustainable while still providing its benefits, and thankfully, environmentally-friendly cryptocurrency is on the rise.
These environmentally friendlier cryptocurrencies are not easy and quick to adopt as the size of the currency industry is on a global scale, but the demand for them stays high.
Not all of us can contribute in terms of technology development. Still, by implementing the 6Rs method - rethink, refuse, reduce, reuse, repair, and recycle. As I have mentioned in my previous article, we can change our lifestyle to a sustainable one, to balance energy consumption!
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NFA: Not Financial Advice. IYOPS or the author(s)/editor(s) are not registered investment advisors or brokers/dealers. All investment opinions expressed are from the personal research and experience of the author/editor and are intended as educational material. Despite our best efforts to make the information available as accurate as possible, occasionally, we err, as humans do.
DYOR: Do Your Own Research before making any investment decisions based on your personal circumstances. We recommend taking professional advice before making any investment decision.
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Olivia Eugenia is an Environmental Science student at the University of Western Australia. She is also an activist and a content writer at the International Youth Organization for Peace and Sustainability.
Inputs and Edits by Kristiana Nitisa, Sovena Ngeth, and Aswin Raghav R.