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The University of Southampton
Southampton Business School

Calculating the climate cost

Published: 18 January 2021

Dr Larisa Yarovaya, Deputy Head of the Centre for Digital Finance (CDF) at Southampton Business School, and colleagues are analysing the role of cryptocurrencies in the digital economy and, in particular, their carbon footprint.

Freedom to trade

Cryptocurrencies are methods of electronic payment that do not require any authorisation from the bank or any other central authority. This means anyone can trade with them; therefore, they can provide more freedom in terms of where, when, and how the amount of money can be transferred from one party to another.

There are many types of cryptocurrency to invest in.

The most famous currencies, such as Bitcoin and Ethereum, are mineable cryptocurrencies, that can be created with specific energy-intensive computer algorithms, which produce code that form the currency. There are also non-mineable currencies that are less energy consuming. For example, Stablecoins are cryptocurrencies that are backed by real assets such as commodities or fiat currencies.

“Analysts believe individuals are now becoming more familiar with cryptocurrencies and have more trust in the concept. This is especially true during the COVID-19 pandemic where investors are looking to protect their assets. Stablecoins are less volatile than popular mineable currencies, but still provide investors with the opportunity for significant returns, which are higher than returns from traditional financial markets,” says Larisa.

The energy cost of mining

Larisa explains that for investors that are comfortable with risk, mineable currencies can be very lucrative. However, the environmental concern associated with ‘mining’ could become a stumbling block to their growth.

For example, the more Bitcoin that is mined, the harder it becomes to find the right computer code to make more. Therefore, this process needs increasing levels of computing capacity and associated energy.

“The energy consumption associated with Bitcoin mining has increased from 9.5Twh to 77.8Twh in merely three years,” says Larisa.

“It has been estimated that by the end of 2020, cryptocurrency mining will account for 1.5 per cent of the world’s total energy consumption.”

Fuel sources used in cryptocurrency mining are significant. As of today, most mining pools – groups of miners working in specialised warehouses, with huge investment in hardware and infrastructure – are situated in China.

These networks thrive on energy realised from coal-fired power plants, leaving behind an extensive carbon footprint for each unique Bitcoin transaction. “The second-largest mineable cryptocurrency, Ethereum, also relies on the same energy-intensive algorithm. However, in time this will switch to an alternative proof-of-stake algorithm to make the system more efficient.”

Influencing global energy markets

Larisa and colleagues have been analysing the environmental impact of cryptocurrency markets. In particular, they have found that Bitcoin price volatility and mining characteristics can affect energy markets, utility companies and green Exchange Traded Funds (ETD).

To put it simply, this means that mineable cryptocurrencies will impact all of us through our energy bills, and add to the climate crisis.

Larisa and her team now plan to study the whole cryptocurrency market to analyse its energy consumption and its impact on the environment, to affect change on how these electronic currencies are mined and used.

For more information on Larisa’s work, visit the Centre for Digital Finance.

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