Since the launch of Bitcoin in 2008, cryptocurrency has seen a meteoric rise. Once thought of as the domain of the dark web only, cryptocurrency has become one of the fastest-growing investment avenues in the world, and has been embraced by investors from numerous demographics, as well as by entire nations, such as El Salvador in late 2021. Investors will soon even be able to incorporate cryptocurrency into their 401(k) retirement portfolios through ForUsAll’s Alt401(k), which allows participants to designate a portion of their contributions* in up to 40 different digital currencies via its self-directed cryptocurrency window.
Though energy consumption is a concern now, through a combination of institutional, technological, and personal strategies, cryptocurrency can be part of a greener future.
So, it seems that crypto is here to stay. However, one of the major concerns that stops many everyday investors from embracing crypto is the concern about its environmental impact, especially as everyday people begin using it to bolster their retirement savings in a crypto-friendly 401(k) and other new crypto avenues. First, it’s important to understand the potential effects of decentralized digital currencies, and then learn how to minimize or mitigate these effects when possible. Though energy consumption is a concern now, through a combination of institutional, technological, and personal strategies, cryptocurrency can be part of a greener future.
How Does Cryptocurrency Work?
Cryptocurrencies are decentralized, digital currencies that operate outside of the stock market. This means that cryptocurrencies are not bound to any one regulatory body, and they are traded in a global peer-to-peer market without the need for brokers. Digital coins are typically not affected by stock market fluctuations, and they skirt many of the regulations that affect traditional investments. Popular apps such as Coinbase, Crypto.com, and others allow investors to buy, sell, and exchange digital assets at any time.
Bitcoin and other cryptocurrencies are powered by a process known as “mining.” Miners, in essence, use energy to generate computer processing power to keep records of electronic transactions on a digital ledger known as a blockchain. “Blocks” of information are processed and distributed to the ledger, and coins are exchanged as payment for the processing power used.
There are many ways to revolutionize the cryptocurrency market to address energy consumption concerns and lower the environmental impact of digital asset trading, and some of those strategies are already in the works.
All that processing power requires energy. For some, the prospect of using energy to create an intangible currency seems like a losing cause. However, there are many ways to revolutionize the cryptocurrency market to address these concerns and lower the environmental impact of digital asset trading, and some of those strategies are already in the works.
How Does it Compare to Traditional Banking?
Not surprisingly, traditional banking is associated with many environmental impacts that do not apply to cryptocurrency. Though modern banking systems are heavily digitized, there is still a large section of the financial sphere backed by tangible items, both used by banking institutions and individual consumers. From the cotton and metals used for physical currency to the paper for record-keeping and the plastic for bank cards, the material needs of traditional banking are immense compared to cryptocurrency. For instance, almost 6 billion plastic payment cards are produced each year, and because they are replaced every few years, they add a steady stream of non-biodegradable plastic to landfills. No amount of solar power or renewable energy will eliminate the disastrous effects of large quantities of discarded plastic, nor will it eliminate the ecologically destructive nature of mining for gold and other precious metals.
Because it avoids much of the infrastructure and material costs of traditional financial institutions, cryptocurrency can continue to be streamlined from an energy perspective in ways that traditional banking can’t.
On top of the material waste associated with consumer products for traditional banking, bank branches and ATMs have high space and energy needs. In fact, while Bitcoin is the cryptocurrency that uses the most power per transaction, it produces less than one-fifth of the emissions per year that bank branches and ATMs do, to say nothing of the power needed to run larger financial institutions and headquarters. This number will trend downward if more miners adopt renewable energy sources. Thus, because it avoids much of the infrastructure and material costs of traditional financial institutions, cryptocurrency can continue to be streamlined from an energy perspective in ways that traditional banking can’t.
What are Organizations and Miners Doing to Help?
As with many other high-energy endeavors, one of the key ways to mitigate environmental effects is to use renewable energy sources whenever possible. For instance, many large scale and small scale bitcoin miners have switched to solar or other renewable resources to power their mining rigs, thus allowing them to gather the electrical power necessary to mine without added emissions. Though the production of renewable rigs still impacts the environment, the in-use environmental damage of equipment powered by renewables is negligible compared to those powered by fossil fuels. Advances in photovoltaic technology also allow engineers to produce progressively more durable and efficient solar rigs, which may be a cornerstone of a greener crypto economy as these trends continue. In fact, the new coin called Candela actually requires solar energy for trades, and it runs by allowing users to trade units of solar energy using the P2P blockchain.
It stands to reason that crypto miners will continue to streamline their processes, and as engineers develop more efficient technology, the processing needs of even the largest mining rigs may become negligible compared to what they are now.
Another key strategy is to push for more efficiency within the world of mining and digital currency trading itself. Remember, the computers of the mid-20th century were room-sized machines that needed a lot of energy just to perform what we would now consider basic operations. In contrast, today’s standard computers and cell phones have more processing power than the computers NASA used to guide spacecrafts during the Apollo missions, and take a lot less electrical power to run.
Similarly, the technology required to mine cryptocurrency, as well as the technology needed to run apps and trading platforms, is evolving rapidly. It stands to reason that crypto miners will continue to streamline their processes, and as engineers develop more efficient technology, the processing needs of even the largest mining rigs may become negligible compared to what they are now.
One vital way that many crypto engineers are changing the game in an environmentally conscious way is by abandoning the original computational mechanism of early cryptocurrencies, known as Proof-of-Work. Proof-of-Work relies on computers that solve complex math puzzles and reward users with coins. Now, most new coins on the market use the more economical and streamlined process known as Proof-of-Stake, which uses “validators” who contribute (or “stake”) their existing crypto to validate new transactions. Proof-of-Stake processes reduce energy needs by over 99% compared to Proof-of-Work. It’s quickly becoming the standard process for new cryptocurrencies.
What Can Concerned Investors Do?
As more energy-efficient coins are being created, everyday investors can look to multiple avenues to further offset their energy consumption and lessen the effects of crypto investments. As always, the biggest environmental impacts will come with widespread changes at the organizational and systemic levels, but that’s not to suggest that everyday investors can’t do something to help make their portfolios greener. These include general strategies such as using renewables for electronics that run investment software and apps, and investing in companies that are environmentally conscious.
Currently, the coin available to investors that has the lowest energy needs is Cardano, but given how many developers are working on creating more eco-friendly crypto applications, that may not be true for long.
In addition, investors can quickly lower the environmental impacts of their individual portfolios by simply switching highly consumptive coins for coins that use less energy. Currently, the coin available to investors that has the lowest energy needs is Cardano, but given how many developers are working on creating more eco-friendly crypto applications, that may not be true for long.
What’s on the Horizon?
While relatively energy-efficient coins like Cardano and Ethereum 2 are becoming more well-known through many crypto trading platforms, these are not the only eco-conscious solutions in the world of crypto trading. For instance, in 2019, MIT announced that researchers were developing a non-blockchain cryptocurrency in partnership with Algorand. This unique cryptocurrency allows users to verify crypto trades without downloading the full transaction data, as blockchain technology does, meaning that it was able to reduce the per-transaction energy usage by nearly 99% compared to Bitcoin, and up to 90% compared to Ethereum.
Because of the intense scrutiny on Bitcoin and other cryptocurrencies in regards to their environmental impact, reducing the energy needs and emission rates of digital assets has become a high priority. Through technological innovations to streamline computational processes and the use of renewable energy to reduce emissions, cryptocurrency may be poised to usher the financial sector into a more sustainable future.
*The Alt401(k) caps initial transfers at 5% of the total balance, with a 5% cap on future contributions regardless of allocations.