If you follow crypto currency at all you likely remember back in February 2021 when Tesla (NASDAQ: TSLA) announced a $1.5 billion investment in Bitcoin and a plan to accept digital currency as payment for electric cars. By mid-April Bitcoin was trading at a level over $64K. Then in mid-May, Tesla, through its CEO Elon Musk, announced it would stop accepting Bitcoin as payment for its electric vehicles citing the rapidly increasing use of fossil fuels for bitcoin mining. It didn’t take long for Bitcoin to retreat to the $40K range it had previously been trading at.
That statement by Tesla was a wakeup call for many investors and users of Bitcoin. While just about everyone knows about Bitcoin, the blockchain and Bitcoin mining aren’t fully understood by many. Mr. Musk is right, it takes massive amounts of energy to facilitate the computers that mine cryptocurrencies on the blockchain.
According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin currently consumes around 110 Terawatt Hours per year — 0.55% of global electricity production, or roughly equivalent to the annual energy draw of small countries like Malaysia or Sweden.
Many companies that use hundreds of computers to mine Bitcoin will negotiate with utilities to get a favorable energy rate before they set up a facility. Since crypto currency mining can be done from virtually anywhere it makes economic sense to set up shop wherever the cheapest energy can be negotiated. Energy generated from hydro powered plants are popular, not so much because they aren’t burning fossil fuels, but because they can be competitive.
What can be done? Bitcoin currently works on a blockchain proof-of-work (PoW) protocol, an energy intensive model that the blockchain was built on. A new protocol, proof-of-stake (PoS) is the model many crypto currencies are using or working toward (Ethereum is working to transition to PoS).
The difference in energy consumption between the two protocols is dramatic, some of the newer crypto currencies utilizing the PoS model consume only a fraction of the energy Bitcoin does. The dilemma facing the crypto currency sector right now is that conversion to the PoS model can be very time consuming and the crypto currencies already using PoS aren’t nearly as popular or widely used as Bitcoin or Ethereum.
Some of the newer PoS based cryptos also offer passive income by way of a dividend depending on your method of holding them. Some of these are Stratis, Algorand, Fetch, One, and Tron amongst others. Along with energy efficiency these dividends have been a draw for investors.
More than one pundit within the crypto currency world has predicted that Bitcoin will eventually move to the more energy efficient PoS platform. The consensus amongst those pundits is that Bitcoin will wait to see how the move works out for Ethereum, who has already committed to the transition, before they commit to it. Transactors writing Bitcoin smart contracts today may want to ensure they can be transitioned to a PoS protocol later.
Regardless of your opinion of Elon Musk, he has pointed out a flaw with the crypto currency/ blockchain model of transacting business and made us realize we are at a crossroads in the sector. The best thing we can do as crypto users or investors is to research the currencies we engage in. There are thousands of them out there, some already energy efficient and some transitioning into energy efficiency and we should know where they stand.
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