With China’s Ban, is Energy Waste an Existential Threat to Bitcoin?
As Chinese coal-rich province of Inner Mongolia bans Bitcoin mining, its eco-sustainability concerns make a comeback. People’s attitudes drive much of the markets, including Bitcoin. Will people accept Bitcoin’s need for energy, or will they compromise for an eco-friendly cryptocurrency alternative?
Chinese Region Bans Bitcoin Mining Due to Energy Consumption
Under the stated reason of curbing wasteful energy consumption, the third-largest Chinese autonomous region of Inner Mongolia has banned cryptocurrency mining. Spanning 7.75 million square feet (1.17 million km2), but only holding 24.7 million inhabitants, Inner Mongolia makes up for 8% of global Bitcoin mining.
This means that just Inner Mongolia has more Bitcoin miners than the United States, with its 7.2% contribution to global BTC mining. In total, China still remains the center of BTC mining, responsible for 65% of all Bitcoin mining. After failing to meet energy usage quotas put forward by Beijing, Inner Mongolia will have to shut down existing crypto mining operations by April 2021.
Likewise, new crypto projects will no longer be approved. Although such a ban comes under the umbrella of making steel and coal industries more energy-effective, Bitcoin is the first on the chopping block. Given China’s historic animosity toward Bitcoin, this development is not surprising.
Didn’t China Already Ban Bitcoin?
With China often being reported as one of the major countries to have “banned Bitcoin”, its exact legal status lost critical nuance. It is not that China banned Bitcoin. Rather, it banned ICOs in 2017, which was understandable if we take into account that most ICO projects turned out to be fraudulent.
More importantly, during 2019, China increased its efforts to put crypto exchanges out of business. However, these measures did not make Bitcoin illegal in China. Beijing Arbitration Commission (BAC) still recognizes Bitcoin as a virtual commodity instead of legal tender. Therefore, it doesn’t prohibit its trade when it is NOT used as a currency.
Such delineation is quite similar to the one in the UK, in which Bitcoin is also not viewed as legal tender but as a “cryptoasset”, subject to capital gains tax. However, instead of allowing the decentralized crypto sector to thrive, China opted to leverage blockchain/DLT for its own purpose. As a result, China is the farthest ahead in tokenizing its economy via CBDCs.
Does Bitcoin’s Energy Consumption Make it Vulnerable?
After Elon Musk decided to buy $1.5 billion worth of Bitcoin via Tesla, he came under a concerted media attack. In unison, media outlets hurried to point the seeming incompatibility between Bitcoin’s energy consumption and Tesla’s sustainability drive.
The Tokenist pointed out how this line of reasoning fails on multiple levels.
However, the fact remains that most people are eco-friendly.
This means that such sentiment can be leveraged. It is easy to extract and quantify Bitcoin’s energy consumption, while omitting the context of deeper governmental waste. It is also easy to omit what Bitcoin replaces and why it uses so much energy.
With annualized electricity consumption of 128.84 TWh, Bitcoin is often compared to Argentina, signifying a digital nation that places a further burden on the planet’s ecosystem. Relying on zero-knowledge proof of work (PoW), Bitcoin’s network of computers (nodes) uses this vast computational expenditure as a safeguard measure, alongside adding new blocks. In order to be subverted, the hypothetical opposing force would have to exert as much computing power as the combined force of miners.
Impossible Cost to Corrupt Bitcoin as the Price for its Energy Consumption
In practical terms, this makes Bitcoin virtually impossible to be corrupted. However, it also means that its greater adoption entails even greater energy consumption – generating more “insert country for comparison” headlines. In a vacuum, this may not pose an issue, but Bitcoin is not a unique cryptocurrency. It is only the first one, riding the network effect benefits.
Even those altcoins using the same proof-of-work algorithm, such as Litecoin, are more energy efficient. Other cryptocurrencies, like Cardano, use proof-of-stake (PoS) algorithms, making them even less energy-intensive. While such alternatives exert different attack costs, environmentalism will continue to put pressure on Bitcoin — likely to the point of stifling its adoption.
Nonetheless, it is safe to say that such concerns will become more acute much later. Arriving at the current point of Bitcoin’s near $1 trillion market cap was already difficult enough. Of more pressing concern is the Fed’s continued drive to increase the money supply amid the lockdown-devastated economy.
This makes it more likely that Bitcoin will be tested soon as a hedge against inflation. If it passes this test, it will generate much good-will, offsetting other concerns for many years to come. In the meantime, those concerned now can follow the lead of skeptic-turned-enthusiast, Kevin O’Leary of Shark Tank fame, and invest in eco-friendly Bitcoin mining:
People often say Bitcoin’s only weakness is that it could be eventually supplanted by another cryptocurrency. Do you think the eco-friendly culture has what it takes to make that happen? Let us know in the comments below.