Why Bitcoin’s Dirty Price Tag Should Scare You

MANILA, Philippines – More than a decade after the first Bitcoin was minted, cryptocurrency has slipped into the mainstream. While you probably can’t pay with it at your local supermarket yet, Filipinos are already keen on the idea.

At a glance we can see how:

• The Philippines ranks 15th out of 157 countries in crypto adoption, according to US blockchain analytics firm Chainalysis
• an estimated 4% of Filipinos own cryptocurrency, with Bitcoin being the most popular, data from crypto payment gateway firm TripleA showed
• the volume of crypto transactions in the Philippines has increased by 362% in 2021, according to the Bangko Sentral ng Pilipinas

In emerging markets like the Philippines, cryptocurrency is often used as a cheaper and faster way to transfer money from abroad.

The skyrocketing price of Bitcoin has also attracted investors eager to make a quick profit. In fact, crypto adoption is on the rise, helping Filipinos save money on remittances and profit from speculation.

The catch: Bitcoin happens to be the dirtiest cryptocurrency.

To absorb energy

To understand why, we need to look at how Bitcoin works. Bitcoin relies on the proof-of-work system in which “miners” around the world solve complex mathematical problems to create new coins and to verify transactions.

The fastest miner to solve the problem is compensated in Bitcoin. This decentralized network of miners makes Bitcoin secure since transactions are recorded separately by miners everywhere. Think of thousands of bookkeepers all cross-checking each other’s work.

Unfortunately, this also increases energy costs. This means that each transaction – regardless of the amount – will go through hundreds of thousands of computers, rather than a centralized network. As a result, a single Bitcoin transaction uses as much energy as 1 million Visa transactions, or enough energy to run an average air conditioner for almost seven months.

An estimate from the Cambridge Bitcoin Electricity Consumption Index showed that Bitcoin runs on an estimated 144 terawatt hours (TWh) per year. That is more electricity than the entire Philippines used in 2020, which is around 102 TWh.

We can also compare Bitcoin’s energy use with our current payment systems. This includes the creation, distribution, transaction and disposal of notes, coins and credit and debit cards – basically everything in our wallets and bank accounts.

The International Monetary Fund’s estimate is 47 TWh annually. That’s three times less than what Bitcoin uses, and Bitcoin isn’t even used in daily transactions yet. If people started using Bitcoin in every corner store, this energy cost would increase exponentially.

Digital money, physical waste

Another problem with Bitcoin mining is the volume of e-waste it produces.

When there are more miners, it also becomes more difficult to create new coins. This means that miners constantly need the best and strongest computers to win the race.

A decade ago, miners could mine coins on their desktop computer. That won’t cut it now, especially when other miners have entire warehouses filled with specialized computers, each one 100,000 times faster than even the best home computers.

On average, miners upgrade their devices every 1.3 years, according to a study published in the journal Resources, Conservation, and Recycling. This leaves about 30.7 metric kilotons of e-waste each year – on a per transaction basis, that’s like generating as much e-waste as two iPhones. And this waste problem is unlikely to go away anytime soon. As Bitcoin prices rise, more miners are likely to join the network, putting more pressure to upgrade their hardware to stay ahead. The result: even more waste.

Is it all worth it?

While other industries such as mining may have larger environmental footprints than crypto, it is still fair to ask whether Bitcoin creates enough value to justify the large costs of energy and waste.

This is where Bitcoin runs into a wall: it’s a waste of design. Ultimately, only one miner earns the Bitcoin reward.

All the work done by the other miners is simply discarded because they didn’t win. In a way, this proof makes the system secure. It requires so much computational power to manipulate Bitcoin that it simply wouldn’t be profitable. But it also means that legitimate transactions waste a ton of energy.

This energy consumption means potentially huge carbon emissions. A recent study by the Technical University of Munich, ETH Zurich and the Massachusetts Institute of Technology estimates that only 25% of the Bitcoin network’s energy comes from renewable energy.

Bitcoin mining can spew about 65 million tons of carbon emissions a year, which is worse than advanced economies like Singapore and Israel.

Ultimately, the question of whether this is justified comes down to how we define value. If we consider Bitcoin as an alternative to today’s payment systems, we see that it is far less efficient in terms of time, energy and carbon than what we have today. (READ: [ANALYSIS] The Philippines’ Cryptocurrency Opportunity)

However, even if we consider it a store of value like gold, we see that Bitcoin’s price does not behave like the price of gold, and sometimes even moves in the opposite direction. If that’s the case, where does Bitcoin’s future go from here?

A sustainable future

The answer may come from other cryptocurrencies leading the way. Cryptocurrencies are gradually shifting from the proof-of-work system to what is called proof-of-stake. This newer system uses far less energy.

Ethereum, the second most popular cryptocurrency, is set to make the change this year. This new system is expected to reduce the energy consumption of Ethereum by 99.95%, which will bring the energy cost per transaction on par with Visa.

But Bitcoin itself has no plans to switch. This means that the most popular cryptocurrency in the Philippines will likely continue to gobble up resources. Although the Philippines does not host many miners, we are still among the top in crypto transactions.

As authorities consider imposing a crypto tax, its heavy environmental price tag should be factored into the decision-making process.

As more Filipinos keep their investments, send remittances and trade with Bitcoin, we need to be mindful of the huge energy costs it entails. – Rappler.com

Lance Spencer Yu is a Rappler intern. He is studying BS Management of Financial Institutions at De La Salle University.