January 2021 Update and TL;DR Summary
In the few months since this piece was first posted, the price of gold has remained relatively stable (about 5% fluctuation). Meanwhile, the price of bitcoin quadrupled to hit a new record high of over $41,000 — primarily influenced by fears of US political instability. This skews some of the original financial comparisons of gold and bitcoin, but the main argument remains the same. Both bitcoin and gold are still unwise investments.
Let me clarify. I make no predictions regarding the future financial value of gold or bitcoin. I purposely avoid this given Bitcoin’s rocky but tenacious history. One can argue that Bitcoin will eventually make the list of largest speculative bubbles of all time or that a bitcoin will someday reach $1 million. I have no idea (and probably nobody else does either). For this reason, I do not invest in or bet on the price of bitcoin or gold. It’s not my kind of game.
However, there is ample evidence that the current environmental price of mining bitcoin and gold make them unsustainable investment vehicles. If people keep investing in them, others will continue to mine them at a terrible cost to the planet. This is not to say that all investments in the stock market are green. However, the implications of buying stock in a coal mining company are more obvious.
Unfortunately, there is probably no way to make gold mining environmentally friendly. Meanwhile, Bitcoin’s massive carbon footprint is a result of its intentionally energy-inefficient computational requirements. As bitcoin prices go up, we will see more cases like the upstate NY coal-fired power plant, closed a decade ago, that was recently retrofitted to natural gas and now hosts a bitcoin mining operation. Cryptocurrency could be made sustainable with innovation, but it starts with acknowledging that cryptomining cannot ignore climate change.
If you want all the nuanced details, enjoy the rest of the article.
During times of economic upheaval and sobering economic forecasts, market volatility can scare many away from the stock markets. Likewise, with interest rates near zero, it’s difficult to find low-risk investments that beat inflation. In such times, some investors flock to gold as a source of durable value. Aside from its decorative and industrial uses, gold was an early material of ancient currency and later a backing standard for currencies until the 20th century. Modern society now runs on fiat, where currency is backed by faith in the economic governance of sovereign nations. Fiat currencies have the distinct advantage of more flexible monetary policy. Yet, when people lose faith in a government’s ability to deal with economic instability, some skeptical investors turn back to shiny gold.
In recent years, Bitcoin, the most popular cryptocurrency, has also attracted investors — especially those with libertarian sensibilities — for some of its gold-like qualities. While a bitcoin has no intrinsic value, bitcoins can’t just be minted or printed at will like fiat money which can result in hyperinflation when poorly managed. Rather, a bitcoin must be “mined” — created by performing the computations that verify the integrity of Bitcoin’s blockchain distributed ledger system. Some economists have argued that Bitcoin is now a safe-haven asset that can be used as a complement to gold when hedging against stock volatility. Others argue that Bitcoin primarily has speculative value and high volatility that behaves very differently from gold. Originally designed as an alternative to fiat currency, there is considerable skepticism regarding Bitcoin’s ability to meet its intended function as a medium of exchange. As long as investors use cryptocurrency for speculation, no one will use it as actual currency (see Bitcoin Pizza Day). Of course, no one is using gold as currency anymore either, so maybe Bitcoin really is the new gold.
It is no surprise that most gold and bitcoin investment discussions focus on monetary theory and wealth creation — that is what economists and financial analysts are paid to talk about. Much less is said about the larger social and environmental implications of investing in gold or Bitcoin.
Gold has a long history of luring intelligent men into making poor choices. Isaac Newton, who laid out the foundations of calculus, gravitational theory, and optics in the 17th century, spent an inordinate amount of time as an alchemist attempting to transmute base metals into gold. It would be centuries before scientists realized that gold can only be created by nuclear, not chemical, reactions. Thus, the only place gold can be formed is in particle accelerators or stars — neither of which is particularly practical. Two hundred years later, Nobel laureate Fritz Haber, a problematic figure in science history, ingloriously ended his science career attempting to extract gold from seawater. While at least technically possible, it still wasn’t profitable.
So far, a geological gold deposit is the only way to obtain gold at a profit. However, mining gold has gotten progressively harder over time. Humans have been scouring the planet for millennia in search of gold (and numerous legendary cities of gold). Gone are the days of gold rushes where one could hope to recover reasonable amounts of gold out of stream beds and shallow mines. Although one can still pan for gold using nothing more than water, gravity, and a good arm, most “artisanal” gold mining is more labor intensive and dangerous. Using outdated techniques, unregulated small-scale gold mining around the world collectively accounts for the largest source of global mercury pollution. Modern large-scale commercial gold mining isn’t much better. Using heavy equipment, low-concentration ore is mined from large open pits. Between the land disruption, extraction process, toxic mining waste, and energy use, the environmental impact is tremendous. Considering energy use alone, a 2020 study in Canada estimated that gold requires over two hundred times more energy to mine than iron.
Furthermore, the environmental impact of mining gold tends to increase over time as the most accessible and rich deposits are depleted. While gold has highly desirable decorative and industrial uses, investors are primarily attracted to the difficulty of mining gold which results in a relatively stable gold supply. Ironically, a majority of gold is used for non-essential purposes such as jewelry. When investors further drive up the market value of gold, the incentive only increases to mine more gold regardless of the costs to the environment and human health.
Bitcoin: New Gold?
Despite being only about a decade old, Bitcoin also has a history of encouraging smart people to make questionable decisions. Most mainstream Bitcoin news has alternated between reports of young crypto-millionaires and unrecoverable bitcoin hacks. To outsiders, cryptocurrency gives the impression of the Wild West. More recently, discussions have shifted towards the environmental impacts of mining bitcoin. There is work suggesting that the cost of environmental and human health “cryptodamages” effectively negates the market value of mined bitcoin, but these public externalities are not captured as a cost to the cryptominers.
While there is some criticism of the substantial e-waste generated from cryptomining, detractors have focused primarily on energy use. Given the limited oversight, complex market forces, and rapid pace of technological change, it is difficult to estimate exactly how much energy bitcoin mining consumes or the total carbon footprint of Bitcoin. According to the Cambridge Bitcoin Electricity Consumption Index, the annualized energy consumption of Bitcoin is somewhere between 35 and 95 TWh [terawatt-hours] as of the end of September 2020. Meanwhile, the Bitcoin Energy Consumption Index (BECI) estimates an energy use between 55 and 70 TWh for the same period. Incidentally, the same analysis also estimates a carbon footprint of 33.08 Mt CO2e [million metric tons of CO2 equivalent greenhouse gases], equivalent to Denmark, and an e-waste footprint of over 12 kt, comparable to Luxembourg.
A cursory review of recent academic literature illustrates the uncertainty of Bitcoin’s energy consumption and carbon footprint.
- Mora et al. 2018: 114 Twh and 69 MtCO2e in 2017
- Masanet et al. 2019: 28 Twh and 15.7 MtCO2e in 2017
- Houy 2019: 2.9–35.1 MtCO2e in 2017
- Stoll et al. 2019: 45.8 Twh and 22.0–22.9 MtCO2e in 2018
- de Vries 2020: 87.1 Twh in 2019
- Sedlmeir et al. 2020: 60–125 Twh in 2020
The range presented is substantial with annual greenhouse gas emission estimates ranging from about that of Iceland to that of New Zealand — or for a comparison in the US, Washington D.C. to South Carolina.
Bitcoin versus Gold
A 2018 study compared cryptomining energy consumption to the energy needed to mine various metals. The study found that from January 2016 to June 2018, Bitcoin consumed an average 17 MJ of energy to generate $1 USD while gold mining consumed 5 MJ per dollar generated.
According to a 2020 life cycle analysis, the entire gold mining process in Canada consumes an average 149.8 GJ of energy for each one million grams of gold produced and releases an average 4922 kg CO2e in greenhouse gases. If we use the 2016–2018 average trading price of gold, these two studies agree on the energy needed to generate $1 USD of gold.
So, if Bitcoin requires about triple the energy of gold to “mine” $1 USD of market value, what about greenhouse gas generation? Applying the estimate of Canadian gold mining emission rates to the 2019 world gold production of 3275 metric tons, the total greenhouse gas emissions from gold mining was about 0.02 MtCO2e. Even assuming other countries are far less efficient at mining gold, the total 2019 greenhouse gas emissions of gold mining are <1 MtCO2e.
At an approximate market price of $1900 USD per troy ounce (as of early October 2020), the market value of the 2019 world production of gold is about $200 billion USD. This is about the same as the market value for all Bitcoin mined since its inception. Thus, even if we use the smallest emissions estimates for Bitcoin, it still generates several times more greenhouse gases per $1 USD in market value generated.
This suggests that Bitcoin defenders are overestimating the effects of cryptominers moving to places where the cost of electricity is cheap — typically near hydropower with minimal climate impacts. The counterargument is that there are few cryptomining operations powered solely by renewables. Bitcoin miners must maximize operations before expensive equipment becomes obsolete and fluctuating availability of renewable energy means that fossil fuels are occasionally used to meet this large continuous load.
Furthermore, it is an oversimplification to argue that cryptomining is relatively harmless when it only uses renewable energy. Currently, any clean power used to mine bitcoin displaces other essential energy users to dirtier power sources. Until the world has converted entirely to renewable energy, unnecessary consumption of the limited supply of clean power cannot be consider harmless.
Likewise, because renewable energy sources are often far from population centers, Bitcoin proponents argue that bitcoin mining can be a beneficial use of otherwise underexploited energy assets when local heavy industry leaves. If a clean energy source is underused because of insufficient transmission lines, the correct solution is not to start mining bitcoin, but to improve transmission lines so that the source is no longer “stranded” from potential users. Oil drillers are rightly criticized for flaring “unusable” natural gas for lack of infrastructure and the same applies to renewable energy.
Let us end this comparison by clarifying that gold is not necessarily a less environmentally destructive financial asset than Bitcoin. It may use less energy to mine and have fewer climate impacts, but this neglects the substantial ecological destruction and pollution of land and water. Much like the e-waste issue with cryptomining, there are many other environmental and human health impacts that are left out of these simple comparisons.
Is Cryptocurrency the Future?
If validating Bitcoin’s blockchain is too energy intensive, it will not be practical or safe for humanity or the planet. However, there many alternative methods of validating a blockchain-based cryptocurrency — many of which are more energy-efficient than Bitcoin’s method. Bitcoin uses a Proof of Work approach which is highly secure but is energy intensive and tends to concentrate wealth towards the owners of computational resources (the wealthy). Alternatively, there is also a popular Proof of Stake approach that validates the blockchain ledger and awards coins by current ownership in the system. This method, by its very definition, tends to concentrate wealth towards current cryptocurrency holders (again, the wealthy). There is a debate regarding which approach is more equitable, but both are problematic — either way, the rich get richer.
If these were the only options, crypto-anarchists hoping for a utopian financial revolution would be sorely disappointed. Replacing an inequitable economic system run by corporations with an inequitable system run by techno-libertarians is not much of an improvement. However, there are alternatives, such as Ripple’s Consensus mechanism, that do not involve mining (awarding more currency) and use far less energy. Ripple claims its transactions use over 50,000 times less energy than Bitcoin. Of course, some don’t consider Ripple a true cryptocurrency.
No one knows which, if any, cryptocurrency will succeed in replacing or working in parallel with fiat currency. Nor do we fully comprehend the unintended consequences (both good and bad) of using cryptocurrencies. The only thing that is clear is that Bitcoin is a flawed first attempt. Like the first car, airplane, or computer, Bitcoin is a clever, but impractical conceptual demonstration. Fortunately, the very idea of cryptocurrency is still in its infancy. There is still considerable room for innovation and reasons to be cautiously optimistic.
More than Money
One should keep in mind that uncertainty is always large when dealing with poorly tracked global activities, but the evidence shows an unfortunate common trait of gold and Bitcoin mining. Without the artificial valuation boost created by the odd mix of speculative and frightened investors, there would be substantially less incentive to mine either. Every time an investor buys bitcoin or gold, desperate or reckless miners are encouraged to engage in activities with questionable benefits but known substantial harms to the environment and human health. The higher the price of gold and Bitcoin goes, the more destruction. Until such behavior is more widely regulated, ethical investors need to be cautious.
Living an ethical life depends on informed decisions. When searching for jewelry, one can choose dirty gold and blood diamonds or sustainably cultured pearls. Both are aesthetically pleasing, but one comes with uglier hidden consequences. When it comes to investing, Bitcoin may be the new gold, but neither are all that attractive upon closer inspection.