What has happened?
The digital currency consumes 511 kilowatt hours of electricity for one coin to change hands, according to research by digiconomist. That is equivalent to 330,000 Visa transactions, making it the most energy-intensive form of electronic trading known today. The computer energy needed to process the immensely complex and power-hungry blockchain algorithms necessary for a single transaction would also be enough to power 17 US households for one day.1
In March 2019, the total energy consumption of the entire bitcoin network, including the ‘mining’ cost of making units of the cryptocurrency, was calculated to be 51.5 terawatt hours per year. That’s higher than the entire annual electricity consumption of Romania, which was 49.6 terawatt-hours per year in 2016.2
Why is it important
Despite a boom-to-bust bubble that saw the value of each bitcoin rise to over USD 17,000 in December 2017 before crashing to under USD 8,000 in six weeks, bitcoin remains popular as both an alternative means of exchange, and as an investment. The overall market is worth about USD 70 billion.3
Such is the scale of bitcoin use that it now accounts for 0.23% of global energy consumption and 24.4 million tons of CO2, equivalent to what four million petrol engine cars produce in a year.4 Another problem is that the leading data mining companies – half of which are known to be based in China – tend to be heavily reliant on coal for generating their electricity. This means the bitcoin industry makes a significant contribution to global warming without falling under the kind of regulation that nations are subject to.
And it isn’t likely to change soon, given that the bitcoin industry had revenues of USD 2.8 billion in 2018. It provides much needed revenue and jobs for many emerging markets such as Georgia, which has one-quarter of the world’s bitcoin mining facilities and is responsible for 15% of all bitcoins created globally. The country with the highest carbon intensity is another former Soviet republic, Estonia, whose 793 grams of CO2 produced per kilowatt hour is higher than China’s 711 grams.5
What does it mean for investors?
“We have always expressed our doubts with regard to the proof-of-work consensus mechanism behind Bitcoin: not only are there energy-usage concerns, but also transaction speed is low,” says Patrick Lemmens, portfolio manager in the trends investing team. “Fortunately, there are alternatives to proof-of-work that are less energy and time consuming.”
“We are not actively investing in cryptocurrencies, but are positive on the underlying technology. We think that cryptocurrencies are likely going to be used by large financial institutions and central banks to increase their system efficiencies. Once regulated cryptocurrencies appear on the market, one should doubt the long-term ability of the 2,000 payment coins available today to survive.”
“We do see a lot of new activity besides payment coins that have a lot of potential. Real-asset tokenization is one of those alternative use cases. The energy consumption and transaction speed are important considerations in developing that infrastructure. We seek to invest in companies that enable the technology, and keep a close eye on sophisticated users that can transform the technology to profitable business opportunities.”