Like real currency, cryptocurrencies are a medium of exchange which can be used to purchase goods and services virtually. Elon Musk, for instance, announced early this year that Tesla would be accepting cryptocurrencies in exchange for Tesla products, making it the first major automaker to do so. Cryptocurrencies are attractive for several reasons: there are little to no transaction fees, anyone is free to use cryptocurrency without getting approved by a bank and international transactions can be carried out quickly, ideal in a globalized world. Black markets love them too. Our focus is on bitcoin as it is the largest and most established cryptocurrency in circulation.
Supporters of bitcoin emphasize that it is completely deregulated and independent from central banking systems, which may raise an eyebrow or two, especially with Jerome Powell and Janet Yellen. Those who are bullish on bitcoin also tend to be bearish the U.S. dollar. For example, Figure 1 shows the explosive rise in bitcoin against the surge in U.S. money supply since the beginning of the COVID-19 pandemic.
Ultimately, the number of bitcoins that in circulation is capped at 21 million and about 18.5 million are in circulation today, or nearly 90% of the total. Bitcoin is software. It is stored and transacted using distributed and decentralized blockchain technology; technology that chains together blocks of information (i.e., massive databases). Bitcoin miners are rewarded with coins by running computationally-intensive algorithms to complete blocks of transactions.
Figure 2 shows estimated electricity demand associated with the creation and maintenance of bitcoin bounded by high and low scenarios depending on the efficiency of technologies used. The best estimate for bitcoin’s annual electricity demand amounts to about 150 TWh, which is about 0.1% of total annual global electricity generation. This is a negligible draw on a global basis. However, environmentalists have raised concerns about the resulting emissions associated with cryptocurrencies. Had all this bitcoin electricity usage been generated with coal as feedstock, total CO2 emissions would amount to about 135 million tonnes, or about 0.4% of the global total. This is roughly equivalent to the annual emissions of 30 million standard cars. With this, it is no surprise Elon Musk reversed course and recently suspended taking bitcoin payments for its vehicles. Perhaps, Elon and Greta Thunberg can now get along.
FIGURE 1 | U.S. Money Supply and Bitcoin Value
FIGURE 2 | Bitcoin’s Estimated Electrical Demand
