From UPSC perspective, the following things are important :
Prelims level : Bitcoins
Mains level : Feasiblity of Bitcoins as currency
At a time when investors around the world are scrambling to follow the newest financial trend, very few are bothered about the carbon footprint that the cryptocurrency is leaving behind.
If Bitcoin were a country, it would consume more electricity than Austria or Bangladesh!
Footprint of Bitcoins
- T A recent study by Alex de Vries, a Dutch economist, has shown that Bitcoins leave behind a carbon footprint of 38.10 Mt a year.
- The annual carbon footprint of Bitcoins is almost equivalent to that of Mumbai, or to put it to a global perspective, as high as the carbon footprint of Slovakia.
- A recent study has shown that Bitcoins leave behind a carbon footprint of 38.10 Mt a year.
- According to a study titled ‘CO2 Emissions from Fuel Combustion (Highlights) 2017’, Mumbai’s yearly carbon footprint stands at 32 Mt, while Bangalore’s is at 21.60 Mt.
- Vries has been able to create a Bitcoin Energy Consumption Index, one of the first systematic attempts to estimate the energy use of the bitcoin network.
Relation between creating bitcoins and electricity required
- Bitcoins are created by “mining” coins, for which high-tech computers are used for long hours to do complex calculations.
- The more coins there are in the market, the longer it takes to “mine” a new one and in the process, more electricity is consumed.
- As mining provides a solid source of revenue, people are willing to run power-hungry machines for hours to get a piece.
- In 2017, the Bitcoin network consumed 30 terawatt-hours (TWh) of electricity a year.
- As such, each bitcoin transaction roughly requires an average of 300kg of carbon dioxide – which is equivalent to the carbon footprint produced by 750,000 credit cards swiped.
Calculating the carbon footprint
- The major problem with mining Bitcoin is not its massive energy-consumption nature; it is the fact that most of the mining facilities are located in regions that rely heavily on coal-based power.
- Earlier, determining the carbon impact of the Bitcoin network was difficult as tracking down miners was never easy.
- As per the estimates of De Vries, roughly 60% of the costs of bitcoin mining is the price of the electricity used.
- The price of a Bitcoin stood at $42,000 and at this rate; miners would be earning around $15 billion annually.
Other impacts of Bitcoin mining
- The effects of cryptocurrency mining often spill over to other parts of the economy.
- With miners using high-tech computers for hours to formulate new blockchains, these machines do not last long.
- Manufacturers of Bitcoin mining devices need a substantial number of chips to produce these machines and recently, during the Covid-19 crisis, the world had witnessed a shortage of these chips.
- This shortage, now, in turn, started affecting the production of electric vehicles around the world.
What can be done to control the carbon footprint?
- The Dutch economist asks policymakers to follow the path shown by Québec in Canada, where a moratorium on new mining operations has been imposed.
- Although Bitcoin might be a decentralized currency, many aspects of the ecosystem surrounding it are not.
- Large-scale miners can easily be targeted with higher electricity rates, moratoria, or, in the most extreme case, confiscation of the equipment used.
- Governments can also ban cryptocurrencies from digital asset marketplaces as it will affect the prices of a digital currency.
India and the cryptocurrency
- The country, at present, has around 75 lakh cryptocurrency investors who have together pooled over Rs 10,000 crore into Bitcoins and other such digital currencies.
- The prices have surged by over 900%, courtesy of the worldwide boom – a single bitcoin that used to cost around Rs 4 lakh in 2020 now costs somewhere around Rs 41 lakh now.
- FM Nirmala Sitharaman has said that the Centre will take a “calibrated approach” and leave a window open for experiments with blockchain technology.