The short version
- Mining Bitcoin and Ethereum use massive amounts of “dirty” energy from developing nations.
- More eco-friendly cryptos can be mined using proof-of-stake instead of the energy-intensive proof-of-work mining methods.
- Your choice to include crypto in your ESG profile comes down to whether or not you think the energy demands of even an eco-friendly cryptocurrency are worth the overall good that the cryptocurrency brings to the table.
What does crypto’s current environmental impact look like?
Bitcoin alone now consumes more than 1173 kWh per transaction. That’s enough electricity to power the average U.S. household for six weeks.
Bitcoin and Ethereum are projected to consume up to 144 billion kWh and 106 billion kWh in 2022, respectively. That’s more than enough to power Australia for a year and well over 0.52% of the world’s entire energy supply.
Now, raw power consumption alone isn’t necessarily a bad thing if the sources of all that juice is sustainable and the miners aren’t causing a strain on their host country’s power grid.
But sadly, quite the opposite is happening.
According to Digiconomist’s Bitcoin Energy Consumption Index, global Bitcoin mining releases 114.06 megatons of carbon dioxide into the air each year — similar to the total emissions of the Czech Republic.
A big reason why crypto is so “dirty” is because miners tend to get pushed out of countries that are shifting to green energy (China, Iceland) and into developing nations with a heavier reliance on coal (Iran, Kazakhstan, Kosovo).
Then, as a direct result of becoming unwitting hosts to China’s diaspora of miners, these countries suffer rolling blackouts and energy crises.
Perhaps it’s no surprise that Tesla — once heralded as the first automaker to accept crypto as payment — stopped accepting Bitcoin in 2021 due to environmental concerns. Wikipedia followed suit in 2022 by banning all crypto donations, calling out Bitcoin and Ethereum’s egregious power consumption.
How do the other cryptocurrencies impact the environment?
Bitcoin and Ethereum are the most commonly (and ignominiously) cited cryptos in environmental studies simply because the pair represents more than 61% of global crypto trading volume.
Tether (USDT) also lives on the Bitcoin and Ethereum blockchains and rides in the same gas-guzzling SUV.
On a happier note, Binance Coin (BNB) is another story and is often cited as one of the best eco-friendly cryptos to invest in. More on that in a bit.
But first, let’s discuss why some cryptos are vastly more eco-friendly than others.
Why is crypto so power-hungry?
Back in 2009, you could mine a whole Bitcoin in a few seconds using your home computer. Today, it takes a mine the size of a school gym about 30 minutes. What happened?
Well, as you might recall, cryptocurrencies live on a blockchain — a giant online ledger. Crypto transactions are validated and added to the blockchain using cryptographic proof, which is essentially an immensely complex puzzle for your computer to solve.
Whoever has the fastest computer solves the puzzle first and automatically wins a trickle of Bitcoin — that’s mining in a nutshell.
Cryptographic proof also ensures that transactions can’t be repeated, repealed, or overwritten. Ergo, the blockchain’s defense from hackers is a giant, insurmountable wall of computer power.
Now, as the blockchain became more extensive and more complex — and miners around the world got more competitive — the amount of computing power needed to “win” the cryptographic puzzles skyrocketed. This created an arms race between the world’s miners to build more and more powerful computers, which in turn required more and more power.
So here we are. The top cryptos are so complex and difficult to maintain that they’re sucking up nearly a full percent of the world’s energy. And since a lot of coal is burned to mine crypto, anyone hoping that crypto and a green earth can coexist is deeply concerned.
Thankfully, there’s hope.
Do eco-friendly cryptocurrencies exist?
Yes. And more are coming.
See, the process I described above — where miners use brute force computing power to validate crypto transactions and maintain the blockchain — is called “proof-of-work.”
Proof-of-work was never a good long-term solution. Even the founders of Ethereum concede that “Ethereum's current energy expenditure with proof-of-work is too high and unsustainable.”
Therefore, the top minds in crypto are developing a replacement for proof of work called proof-of-stake.
Instead of raw computing power, proof-of-stake cryptos use crypto to validate and maintain their blockchains. Miners will be replaced by “validators” who won’t be rewarded based on the amount of computing power they contribute but rather the amount of crypto they “stake” on the blockchain to assist with validation and maintenance.
The Ethereum folks do a pretty good job of explaining how proof-of-stake works, but for the purposes of this article, the key takeaway is this:
If proof-of-work cryptos such as Bitcoin and Ethereum 1.0 are like gas-guzzling SUVs, proof-of-stake cryptos such as Ethereum 2.0, Tezos, and Cardano are like bicycles.
Speaking of Cardano…
What are some examples of eco-friendly cryptocurrencies?
Cryptocurrencies widely considered to be more eco-friendly than Bitcoin or Ethereum tend to use:
- A more efficient variation of proof of work; or
- A clever alternative to both, as we’ll see with Chia below.
Here are some examples. The energy usage estimates are provided by TRG Datacenters unless otherwise stated.
Cardano (ADA) – 0.55 kWh per transaction
Launched by one of the co-founders of Ethereum, Cardano uses a proof of stake model called Ouroboros to process transactions at 150 times the speed of Bitcoin.
Its worldwide renown as one of the most eco-friendly, cutting edge cryptos has led to it becoming the fifth most-transacted crypto on the marketplace.
Stellar Lumens (XLM) – 0.00022 kWh per transaction
Stellar Lumens, or Stellar for short, was one of the first eco-friendly alternatives to Bitcoin. It launched all the way back in 2014, and uses a controlled, proprietary network called the Stellar Consensus Protocol to ensure transaction costs don’t get out of hand.
As a result, XLM may not be quite as decentralized as Bitcoin, but it’s a darn sight less thirsty, consuming just a few watts per transaction.
Ripple (XRP) – 0.0079 kWh per transaction
Designed in 2012 to help smooth out cross-border transactions for big institutions, Ripple has since become an unconventional investment choice for the crypto community. Ripple cannot be mined — its supply is tightly controlled by the company that keeps most of it in escrow, also called Ripple.
This lack of mining competition has led to XRP’s transaction cost remaining extremely low — and has inadvertently made it an eco investor darling. To set expectations, XRP is both hard to buy and under SEC investigation, but it’s a fascinating case study nonetheless.
Tezos (XTZ) – 0.0415 kWh per transaction
Tezos (ancient Greek for “smart contract”) prides itself on being one of the most eco-friendly cryptos ever. It consumes just a few watts per transaction. This is all thanks to its well-tuned proof-of-stake model, which attracted investors’ attention back in 2017.
After a delayed ICO, however, Tezos had a rough early life, facing scrutiny and legal battles from impatient investors. However, it survived the gauntlet and has grown to become one of the top-traded eco-cryptos.
Chia (XCH) – 0.023 kWh per transaction
The adorable-sounding Chia eschews both mining and staking in favor of “farming.” Users “farm” Chia by dedicating hard drive space. And since SSDs use significantly less power than GPUs, the Chia blockchain uses less than 0.36% of the annual consumption of Ethereum.
Furthermore, Chia’s founders hope their network will give the world a profitable reason to recycle old HDDs.
Oh, and Ethereum 2.0 deserves an honorable mention – it’s just not here yet. Fingers crossed for“The Merge” to happen later this year.
There are many more examples out there of next-gen, eco-friendly cryptos. But before I get carried away, let’s talk about action steps.
Do eco-friendly cryptocurrencies belong in a climate-friendly/ESG portfolio?
If you already have an ESG (Environmental, Social, Governance) portfolio dedicated to society-friendly investments, you might be wondering if cryptos belong in there.
Personally, I think it’s all relative.
Putting performance aside, Cardano deserves space in your ESG portfolio more than Bitcoin or Ethereum do. Considering their environmental impact, the latter two might as well be in stocks at this point — as should all proof-of-work cryptos with decentralized mining.
But just because a crypto is less damaging to the environment than Bitcoin doesn’t mean it’s carbon neutral. Therefore, I think you can vet each individual crypto for your ESG portfolio by asking yourself a simple question:
Do you think this crypto’s positive impact on society outweighs its carbon footprint? If you’re the kind of investor who thinks all crypto is a pyramid scheme, the answer will probably be a universal “no.”
But suppose you see crypto’s potential to wash away the shortcomings of fiat — inflation, intervention, etc. — then yes. In that case, you may find that some eco-friendly cryptos are deserving of your investment capital.
Related: How to get started with ESG investing
The bottom line
Bitcoin is an environmental catastrophe — an objective reality that I think will accelerate its demise.
But the silver lining to the OG crypto’s horrifying power consumption is that it’s accelerating our leap to proof-of-stake and another eco-friendly crypto tech.
Do eco-friendly cryptocurrencies exist? Yes. And they deserve our attention — and perhaps even capital — now more than ever.