What impact do cryptocurrencies have on the environment? Energy consumptions of Bitcoin and Ethereum explained

Ethereum is the latest cryptocurrency to go public on its plans to become more environmentally friendly.

The world's second largest crypto coin has outlined how it intends to undergo a technological transition to improve its energy output by the end of 2021.

It came after billionaire entrepreneur Elon Musk announced Tesla would no longer accept Bitcoin as payment for its products due to environmental concerns about the cryptocurrency's mining process.

Musk's post on Twitter had an immediate impact on the crypto market as prices tumbled from record highs, with most still recovering from the crash which was made worse by China's crackdown on digital currencies.

Yet it appears to have kickstarted some cryptocurrencies to modify their operations if they are to be sustainable and viable decentralised financial options for people to make purchases and exchanges.

How much energy does Bitcoin use?

Bitcoin has set up a dedicated mining council to encourage miners to use renewable sources of energy as well as promote transparency in its usage, amid widespread criticism of the energy-guzzling process.

Reports have surfaced of Bitcoin using more electricity than entire nations have in a calendar year, with the crypto surpassing the complete output of countries like Argentina and the Netherlands did in 2019.

The amount of electricity consumed by the Bitcoin network in one year could power all the tea kettles used to boil water in the UK for 26 years, according to the Cambridge Bitcoin Electricity Consumption Index.

Bitcoin, alone, represents 0.5% of the world's total electricity production and consumption.

How much energy does Ethereum use?

Ethereum, similar to Bitcoin, uses up a lot of energy.

The algorithm used is a proof-of-work model whereby miners have to show their workings before getting the chance to be rewarded with new Ethereum coins.

Ethereum has plans to move to a more energy efficient way of keeping track of its blockchain by adopting a proof-of-stake protocol where miners are selected based on the number of tokens they hold.

Currently, though, Ethereum uses the same method as Bitcoin to mine new coins and therefore consumes a high proportion of energy, on a similar level to the entire energy consumption of Iraq and Peru.

According to the Ethereum Energy Consumption Index, the entire Ethereum network could power close to five million households per day, compared to 50 million that could be powered by Bitcoin's consumption.

How does this compare to other cryptocurrencies?

While Bitcoin and Ethereum - the world's two largest cryptocurrencies - use up a lot of power, there are others that are becoming increasingly popular for having less of an impact on the environment.

Research conducted and compiled by TRG Datacenters in America found that Bitcoin consumes 707 kilowatts per hour (kWh) and Ethereum uses up 62.56 kWh per transaction made. To put that into perspective a fridge uses around 220 kWh.

But at the other end of the scale, cryptocurrencies IOTA (0.00011 kWh), XRP (0.0079 kWh), Chia (0.023 kWh), Dogecoin (0.12 kWh) and Cardano (0.5479 kWh) use far less energy per transaction to Bitcoin and Ethereum.

Are cryptocurrencies bad for the environment?

It is estimated that a miner will spend between 60-80% of their revenue on electricity, due to the complicated process of mining cryptocurrencies.

It is not clear how much of the overall energy consumed mining cryptos comes from renewable sources such as wind or solar power or fossil fuels like coal.

A study by the University of Cambridge and the International Energy Agency revealed 70% of Bitcoin production came from China where renewable energy was used during the rainy summer months but fossil fuels were used for the rest of the year.

In addition, cryptocurrency asset management and analysis firm Coinshares found that 74.1% of the electricity used by Bitcoin is generated from renewables, such as hydropower, making it one of the most renewable-driven companies in the world.

What does the future hold for cryptocurrencies?

If cryptocurrencies are to be the future of finance then there is certainly a conversation to be had with regards to where online currencies get their power from and if there are more energy efficient ways the industry can operate.

Cryptocurrencies seem to be open to the idea of becoming more eco-friendly by either setting up a dedicated council to look into the most energy draining aspect of its operation like Bitcoin, changing habits like Ethereum or agreeing to decarbonise the industry like so many others.

Around 50 companies and individuals from the finance, tech and energy sectors have signed up to the Crypto Climate Accord, which has set its sights on cryptocurrencies achieving net-zero emissions from energy consumption by 2030.