How Worried Should Investors Be About Bitcoin's Long-Term Environmental Impact?

To put it mildly, Bitcoin (BTC 1.02%) mining is an energy-intensive process. Without getting too deep into the reasons, mining the digital currency requires sophisticated hardware that consumes quite a bit of energy. But how much of a long-term problem is this? In this Fool Live video clip, recorded on March 18, Chief Growth Officer Anand Chokkavelu asks cryptocurrency expert Nic Carter about the implications of the energy consumption problem. 

Anand Chokkavelu: Let's switch a little back to Bitcoin, specifically, a lot has been written recently about the amount of energy used to mine Bitcoin. By design, gets more resource-intensive as we go along. How do you think about the environmental impact of Bitcoin mining in the long run? Are there solutions that you think or considerations people aren't factoring in that mitigate the environmental impact?

Nic Carter: Yeah, there's absolutely mitigating factors if you look into how Bitcoin miners actually interact with the Earth's resources, for sure. Although before we even get into that, I will just say Bitcoin is utility like many others like aluminum smelting or like any industrial process that produces a service that we consumers value and like anything else that produces value, it's energy intensive. My general stance on this is that the solution is not to take a line item editor's right pan and go through all the usages of energy in society, but it's to de-carbonize the grid itself. To render the grid greener through combination of nuclear, hydro, and other renewables basically. We don't normally have this discussion where we look at usages of energy and we proscribe them and say, yeah, actually, you are not allowed to watch Netflix (NASDAQ: NFLX) today because I, a third-party, perceive that to be wasteful. That's not typically how that debate goes and so I find it curious that that's a stance that that debate is solely constructed in that way as it pertains to Bitcoin. The other thing I will mention, the mitigating factors is the Bitcoin buys energy on a geography independent basis, which is not the case for the way that population centers consume energy. Typically, we need green energy to be generated near to population centers. You can't just put a huge number of solar panels in the Sahara and then pipe that over to Europe because the energy decays as it leaves the source. Bitcoin, on the other hand, doesn't care where the energy is generated, as long as there's Internet, they'll buy it. Bitcoin will buy the energy from the earth. That makes it more suitable for otherwise curtailed or otherwise wasted sources of energy, in particular, hydro. That's why we see a lot of Bitcoin mining in Southwestern China, in the Sichuan and Yunnan province, because that's where a huge amount of hydro was overbuilt. There is a lot of hydro and so you have the option to either let the water out of the dam and let it be wasted, or run the turbine and sell that excess energy to Bitcoin. Equivalently, you have a similar situation in Texas, and Wyoming, and other parts of the U.S., where you have gas that would be vented or flared, which is a biproduct of oil mining and oil extraction, and that gas can be put to use, put into a generator, some of those harmful gases can be captured, and then Bitcoin can be mined. That's net neutral from an environmental perspective or even that positive. Now, I'm not going to claim that no Bitcoin is mined with coal, certainly, some is. But I think ultimately, it's providing a service that's so useful to the planet and to civilization fundamentally that those externalities are worth it.

Chokkavelu: Got it. Do you think there are also ways that just the actual energy usage will go down over time at all, either through alternatives or just the way things evolve?

Carter: I don't believe in any alternatives and proof of work. That rhetorical taxing will just move to some different consensus mechanism doesn't make sense to me because I've never encountered a consensus mechanism which provides the same assurances as proof of work. I wouldn't believe someone that tells you, Previous stake will just fix it. It doesn't really fix anything. Previous stake just basically installs a cartel and controls the chain, and that takes us back to any other cartel-based financial system, which was the whole thing we were trying to solve in the first place. If you want leaderless, decentralized consensus, you need to have the nodes that are in charge of the ledger, sacrificing something of value, and the purest expression of value is energy. However, Bitcoin security spend, the subsidy that is provided to miners, which thus causes them to consume energy, that could reduce over time, 100 percent. We don't actually know what the trajectory of Bitcoin's energy expenditure will be. We do know that the Bitcoin subsidy, the actual issuance of Bitcoins is declining every four years. Right now, at 6.25 Bitcoins released per block, 144 blocks a day, that gives us an annual inflation rate of 1.8%. That's going to become half three years from now, and then cut in half again four years subsequently, and so on and so forth, until Bitcoin's issuance has stopped. That portion of the energy outlay and that issuance accounts for 85% of miner revenue right now. That's going to reduce to zero and we're going to be left with the fee-based system, where the miners only make revenue from transaction fees. It's quite possible that that fee-based system would be less costly and thus provide miners less revenue, and hence less energy expenditure than the current system. I can't guarantee that, but the point is there's actually uncertainty as to the trajectory that Bitcoin energy outlay is going to take.