The effect of cryptocurrencies on the

environment; A literature review

Imre van den Elsen

i6296681
Date: March 31st, 2022
Tutor: Dr. M. Catola
EBC2186 Intermediate Macroeconomics
Introduction
The first cryptocurrency, Bitcoin, was released in 2009 and since that, many different currencies have followed (Farell
2015). A cryptocurrency is a virtual coin which essentially works the same as a normal currency, like the Euro, with one
main difference; Cryptocurrencies are decentralized, which means that they do not rely on a central authority like the
European Central Bank (ECB) (Farell 2015). The entire Bitcoin network relies on blockchain technology with an
underlying Proof-of-Work requirement, this requires a considerably amount of computational power which,
consequently uses a lot of energy (Farell 2015). When a Bitcoin is used for a transaction, this is shown on the digital
ledger which must be verified by all users which uses a certain amount of computational power, this is called
‘Blockchain’ technology (Farell 2015). More recent research done by Alex de Vries also suggests that the Bitcoin
network is estimated to consume the same amount of energy as Austria, he states that this is due to the energy-hungry
design behind Bitcoin (De Vries 2018).
Currently, the attitude towards the environment is changing; an increasing amount of people worldwide
begin to realise that a transition is necessary (Chen and Chai 2010). The increasing attention for the environment led
to world leaders trying to come up with a plan for the future. The Paris agreement made in 2015 has set long-term
goals to guide all nations towards a brighter and cleaner future (Agreement 2015). The agreement provides countries
with a framework to decrease emissions and work towards a sustainable economy (Agreement 2015).
Recently, when blockchain technology is discussed, it is often assumed that this is only applied by Bitcoin
while it has many other uses. Bitcoin is suggested to be energy-hungry which creates a perception that blockchain
technology is energy-hungry as well. This perception could mean that the worldwide adoption of blockchain technology
and other cryptocurrencies is delayed or even discarded.
The current review aims to generate a better understanding on the effect of cryptocurrencies on the
environment. This literature review therefore answers the following question: What is the effect of cryptocurrencies
on the environment?

Bitcoin design and environmental footprint

Bitcoin relies completely on the peer-to-peer-network of its users, there is no hierarchical power to ensure stability. A
bitcoin, and most other cryptocurrencies, is basically “a chain of digital signatures” furthermore, “Each owner transfers
the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and
adding these to the end of the coin” which means that the ownership is programmed into the coin (Nakamoto and
Bitcoin 2008). Bitcoin uses a ‘Proof-of-Work’ system which uses an immense amount of energy (Farell 2015). De Vries
stated in his research that the entire Bitcoin network consumes the same amount of energy as Austria (De Vries 2018).
However, most studies estimate the amount of energy consumed differently, as shown in the figure on the next page,
which questions the outcome of those studies (Gallersdörfer, Klaaßen et al. 2020). Furthermore, the estimates used
for this figure seem to be calculated in a rather conservative way (Gallersdörfer, Klaaßen et al. 2020). An alternative
estimation which includes auxiliary losses within the mining facilities suggests that estimates should be higher
(Gallersdörfer, Klaaßen et al. 2020). Ultimately, most studies suggest that the entire Bitcoin network energy
consumption is considerable.

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Figure 1. Bitcoin Energy Consumption Estimates 2017–2020 (Gallersdörfer, Klaaßen et al. 2020)

Around 60 percent of Bitcoin mining is done in China due to low energy prices and 16 percent in the USA,
unfortunately China depends mostly on Coal for their energy supply (Badea and Mungiu-Pupӑzan 2021). Another study
suggests that mining centres in China are located near hydropower dams or close to wind energy parks at remote
locations to reduce energy costs (Kamiya 2019). Considering the aforementioned two studies, it can be concluded that
cryptocurrency miners prefer cheap electricity. Furthermore, this boom in energy demand at a certain location, mostly
at locations with cheap energy as stated before, can result in an ‘energy consumption boomtown’ (Greenberg and
Bugden 2019). Such a boom town exists in North Central Washington, Chelan County where the local community is
greatly affected by the cryptocurrency miners (Greenberg and Bugden 2019). In 2017, miners overtaxed the electricity
lines which resulted in a bush fire (Greenberg and Bugden 2019). Moreover, local community members stressed that
the cryptocurrency miners depleted their clean energy from the hydropower dam, which results in the use of fossil
fuels to meet the power demand and increases energy prices thus burdening low-income families (Greenberg and
Bugden 2019). Adding to that, history shows that the hydropower dams affect local fishing supplies. It is also unsure if
any of the benefits reach the local community. However, these boomtowns could also help to generate new jobs and
keep young residents from moving to cities for high-tech jobs (Greenberg and Bugden 2019).
New data from the Cambridge Centre for Alternative Finance suggests that mining has been moved to the
U.S. due to China’s ban on Bitcoin. the U.S. mainly uses fossil fuels which constitutes a threat.
The cryptocurrency does not only result in a higher use of energy, but also in greenhouse gas emissions. One
study suggests that cryptocurrencies “pose a serious threat to the global commitment to mitigate greenhouse gas
emissions under the Paris Agreement” (Truby 2018). Another study suggest that “projected Bitcoin usage, should it
follow the rate of adoption of other broadly adopted technologies, could alone produce enough CO2 emissions to push
warming above 2 °C within less than three decades” (Mora, Rollins et al. 2018). However, a different study shows that
the aforementioned statement done by Mora et al. is not entirely credible (Masanet, Shehabi et al. 2019). Nonetheless,
the effects of the Bitcoin network together with other cryptocurrencies is visible, one study done by Stoll et al.
determined the carbon footprint of Bitcoin mining is likewise to the nation Sri Lanka or Kansas City (Stoll, Klaaßen et
al. 2019).

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 Despite of many studies saying that cryptocurrency is a high energy consumer, a study done by Taskinsoy
states that if all physical money in the world could be replaced by cryptocurrencies, one billion trees could be saved an
keep absorbing CO2 and reduce global warmth with 0.1 to 0.2 degrees of Celsius (Taskinsoy 2019). Another study states
that implementing the blockchain technology used by cryptocurrencies could reduce global warming with up to 0.3
degrees of Celsius by 2050 if implemented in the current decade (Morice, Kennedy et al. 2012).

Comparison with traditional banking

A study done by Hass McCook compares the Bitcoin network with traditional banking (. The researcher first states that
there is a lot of uncertainty surrounding the future of the Bitcoin network. His paper “aims to disprove or support these
claims about the sustainability of the Bitcoin network, and provide an order-of-magnitude comparison of the relative
sustainability of Bitcoin when compared with the incumbent banking industry, the gold production industry, and the
process of printing and minting of physical currency.“ This study certainly makes some interesting points, as traditional
banking requires all sorts of physical properties. Traditional banking needs: gold mining, gold recycling, physical
currency and minting of this currency, ATMs, 7 million workers which need area of facilities. Bitcoin uses electricity and
electrical components which can be recycled for 95 percent. The researcher performs an thorough investigation of his
initial research, as his first study got some criticism. One of the biggest criticism he got was that the comparison was
not fair or did not seem to include scale when it would replace the traditional banking system.
The last edition of his paper concludes the following: “Although the comparisons are not like-for-like, and
with only Bitcoin’s scope of energy use and emissions being 100% defined, we can say that Bitcoin consumes/emits
less than half of what the gold mining industry does, and less than one-fifth of what bank branches and ATMs do.”
(McCook 2018)
Even though cryptocurrency might not be seen as a viable option by some researchers. The Blockchain
technology itself is interesting in different facets of society. A study done by Luisanna Cocco, Roberto Tonelli and
Michele Marchesi considers the cryptocurrency to be superior to the traditional financial systems (Cocco, Tonelli et al.
2019). However, they also suggest that the underlying blockchain technology could also be adopted by financial
systems (Cocco, Tonelli et al. 2019). Traditional banks could discard physical money and only use digital money like
cryptocurrency. When traditional banks would exclude all their costs regarding physical money and adopt a new way
of banking to compete with cryptocurrency, the results of aforementioned comparison might be totally different
(Badea and Mungiu-Pupӑzan 2021).
Nevertheless, much more research is needed to generate a reliable understanding of the energy consumption
of traditional banking and cryptocurrencies. Traditional banking has a massive supply chain and includes almost 7
million people in personal which means that the estimation of energy consumption is extremely complicated (McCook
2018). Cryptocurrencies have only existed for about 12 years now and it advancements will be made which could also
improve energy efficiency. Already new types of mechanisms which replace Proof-of-Work could already massively
reduce the amount of energy required by the industry.

Different types of systems

Cryptocurrencies use different types of mechanisms which all have their own properties. Bitcoin makes use of the
Proof-of-Work (PoW) mechanism but there is also the Proof-of-Stake (PoS) mechanism, the Hybrid PoW/PoS
mechanism and the Byzantine Consensus Protocol.

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 Proof-of-Work is used by Bitcoin and adds safety to their network. The PoW is a data piece which requires a
certain amount of energy to be expended before the transaction is verified. Bitcoin uses this protocol for their
blockchain technology where, all transactions during a period of time are collected into something called a block. The
block is send to all the users currently connected and they begin adding a piece of data (nonce), computing the hash
and then adding the block, nonce and hash to the chain which is then communicated with the users. While the amount
of mineable Bitcoin is increasingly scarce, the amount of energy used per mined Bitcoin is also increasing.
Proof-of-Stake is a different mechanism which instead of relying on computational power, depends on proof-
of-ownership. This results in a much smaller use of energy but also means that the money supply is not capped and
therefore, making it inflationary. The challenge for this system is that the coins are not distributed to the ones mining
the coin, but the coin must decide to whom the coins are distributed to which could host problems such as fraud.
The hybrid system of PoW and PoS uses the PoW for the coin creation and distribution and over time the
system shifts to a PoS mechanism making it more energy efficient.
The Byzantine Consensus Protocol is totally different system which makes use of algorithms and different
servers connecting with each other. The advantage of this coin is that it could host a decentralized control, while
maintaining quick transaction times, flexible trust and energy efficiency. The study done by Ryan Farrel illustrates that
this mechanism has the most potential for the future. (Farell 2015)

Discussion

Summary of findings
Cryptocurrency is generally seen as an energy-hungry coin when it is compared to a traditional coin like the Euro.
Bitcoin relies on blockchain technology and has an underlying mechanism that provides security to the network. The
current attitude towards the environment is changing and therefore the use of cryptocurrency has also been criticized
by different studies for its estimated energy consumption. It is quite difficult to estimate the energy use of Bitcoin and
therefore the estimates might not be reliable. Most of the crypto mining was done in China and later moved to the
U.S. and both countries primarily use fossil fuels to generate energy. This increased amount of energy usage at certain
locations leads to a disruption in the local communities and host a challenge. Greenhouse gasses also pose a threat,
however, different research suggests that when cryptocurrencies replace physical money, the effect is actually positive.
When cryptocurrency is compared to traditional banking, one study suggests that traditional banking is much more
energy-hungry than Bitcoin and that Bitcoin consumes/emits less than one-fifth of what bank branches and ATMs do.
However, new mechanisms could reduce energy usage for cryptocurrencies and therefore make it more viable for the
future.

Conclusion
Cryptocurrencies remain a heavily debated topic and are in desperate need of more research. The concept is still quite
new and therefore evidence for the effect on the environment remains unclear. One could argue that cryptocurrencies
disrupt local communities and is an energy-hungry concept. However, a good long-term application could reduce
energy consumption, gold usage and paper usage. New developments are needed such as an improved version of the

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safety mechanism for cryptocurrencies. Furthermore, the use of renewable energy should also be promoted for
cryptocurrency miners. The future of cryptocurrencies relies heavily on whether it can be made sustainable.

Limitations
There were some limitations while doing this research. The first limitation being the lack of reliable information on
energy usage for both the traditional banking industry and the cryptocurrency industry. Another limitation is that no
standardized method for literature reviews was used, such as a systematic literature review method. This might have
led to incomplete results due to possible lack of incorporating every article on this subject. This could subsequently
lead to possible selection bias. Only papers in English were used which also is a limitation to this literature review.

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