Cryptocurrency price collapse offers hope for slowing climate change – here’s how

Cryptocurrency price collapse

Bitcoin and other cryptocurrencies were designed to be used as electronic cash. As speculative investments, they have gained popularity instead. Cryptocurrencies are not only wasteful and resource-intensive, but also extremely volatile. Since the prices of the two biggest cryptocurrencies, bitcoin and ethereum, have both fallen by more than 55% in the past six months, some have suggested that regulation is necessary to calm the chaos.

A plummeting “stablecoin” dubbed TerraUSD, which is intended to be tethered to the US dollar, is being blamed by some for the falling pricing. But there are likely a number of variables working together to cause the current bitcoin market fall.

Since interest rates have been nearly zero for years, cryptocurrencies and digital non-fungible tokens (or NFTs) connected to works of art appear more enticing as investments than bank bonds and treasury bills. The Bank of England and the US Federal Reserve recently raised interest rates the most since 2000, nevertheless.

Russia’s invasion of Ukraine and ongoing COVID restrictions have also calmed the markets. Although investors are typically apathetic toward banks and governments, Bitcoin was created to be. They are getting rid of cryptocurrency and reducing risk in their portfolios.

Crypto’s loss, climate’s gain?

Over the course of a year, Bitcoin (a “proof-of-work” cryptocurrency) requires about 118.47 terawatt-hours (TWh) of electricity, which is more than all of the US’s home refrigerators put together.

Proof-of-work mining can be viewed as a planned kind of energy wastage. Throughout the procedure, specialized computers randomly attempt to predict a lengthy string of numerals. The network’s hash rate represents the amount of processing power devoted to this project.

The guessing game’s difficulty is automatically changed whenever the hash rate decreases for any reason, such as because of power outages or price declines, to guarantee that the network can continue to award prizes every ten minutes. After that, each winner has a chance to validate network transactions, after which they are given 6.25 newly created bitcoins.

How much the mining company has spent on computer setup and energy usage will determine whether or not the guessing game is lucrative. Recent studies show that bitcoin’s carbon intensity increased by about 17% when China cracked down on mining in August 2021, with only 25% of bitcoin miners using renewable energy and more than 60% depending on coal and natural gas. Though estimates can differ. In the first quarter of 2022, the Bitcoin Mining Council, an industry organization, surveyed around half of all miners and found that 58% of all energy was renewable, including nuclear.

As bitcoin prices rise, mining companies will spend more money on this electricity until the risks outweigh the returns. The financial motivation to squander electricity for bitcoin mining should be lessened when the price of bitcoin declines. That should benefit the climate, in theory. Surprisingly, the network’s hash rate (and carbon footprint) averages around 200 quintillion hashes per second, which is still very close to its all-time high. Given the scope of this ongoing interest, bitcoin mining is presumably still lucrative at the present price. However, how long?

Tipping points and death spirals

Numerous times before, the price of Bitcoin has briefly fallen below the expected cost of production without significantly harming the hash rate over the long run. But if the market remains stagnant for a sufficiently long time, more and more miners will start to give up on proof-of-work cryptocurrencies.

As profitability declines, miners with the greatest costs are likely to sell off their bitcoin holdings, adding to the selling pressure already present in the market. It is typical for smaller, more expensive mining operations—often powered by erratic renewable energy—to submit temporarily.

But the domino effect of significant mining companies shuttering one after another could drive down cryptocurrency values and the network’s carbon emissions quickly to zero. In crypto-speak, this occurrence is known as a bitcoin death spiral.

Other potential tipping moments should be taken into account in addition to bitcoin mining pricing difficulties. Many large investors, particularly those who entered the market at higher levels, are currently underwater and are carrying heavy loads of bitcoin.

Nayib Bukele, the president of El Salvador, is said to have recently increased the nation’s total bitcoin holdings to over 2,300, or roughly US$72 million at the current exchange rate. Losses from his nation’s cryptocurrency investments have increased worries about an impending debt default, which would be extremely painful for individuals who had no input on their leader’s wager.

Bitcoin ban or boycott

In the past, mining companies and cryptocurrency innovators have profited from the state of the economy, lax laws, and inexpensive electricity. Bitcoin miners may raise the costs for locals who want to utilise these resources productively. Additionally, these areas frequently experience the worst of the climate problem, which is made worse by crypto mining.

Governments all over the world want to seem enthusiastic about cryptocurrencies as engines of economic expansion. However, the fall demonstrates that bitcoin is useless as a popular form of commerce and an accurate store of value.

Following the global financial crisis of 2008–2010, countries pledged to take action against risky financial products with inflated prices. It makes sense to take action against cryptocurrency right away for the sake of the world’s economy and stability. However, if efforts to regulate the environment are not sufficiently comprehensive or globally coordinated, the climate contagion caused by crypto could continue to spread.

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