It has been a very strong start to the year for cryptocurrency.
Bitcoin is worth almost double what it was in January, and is five times up on last October.
Meanwhile someone who bought £100 worth of Dogecoin on New Year’s Day could sell it today for in excess of £10,000.
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However, the market suffered a dip this week, after crypto’s highest profile backer, Elon Musk, announced Tesla would stop accepting payments in Bitcoin.
“We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel,” he said on Twitter.
“Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.”
The reason Bitcoin can be so damaging to the environment is due to a process called mining – essentially the way in which new Bitcoin is entered into circulation. Here is what you need to know about it.
How does Bitcoin mining work?
Bitcoin mining is the process of verifying Bitcoin transactions and recording them in the public blockchain ledger.
The blockchain ledger is essentially a digital recording of all transactions, made in chronological order.
Transactions made in real money are verified by banks and other regulatory bodies, but there are no such bodies for cryptocurrency.
Instead, verifications are made by users, by running complex mathematical equations through high-powered computers. Once they solve the equation they can add the transaction to the blockchain.
Miners who verify a transaction are rewarded in Bitcoin, meaning they can earn Bitcoin and make money from it without actually purchasing it. Miners are all constantly racing against each other to verify each transaction and earn the Bitcoin reward.
As of November 2020, a miner receives a reward of 6.25 Bitcoins for every transaction added to the blockchain. That’s the equivalent of over £225,000 at today’s price.
How bad is it for the environment?
Bitcoin is very difficult to mine. You need expensive hardware, large amounts of electricity, and specific software. Even highly-powered regular computers don’t stand a chance of being able to mine Bitcoin.
The hardware required is called application-specific integrated circuits, or ASICs. These can consume as much electricity as 500,000 PlayStations, which explains why the profit margins for mining Bitcoin aren’t quite as wide as you might initially think. To combat this, many miners team up to create pools sharing the electricity load as well as the profits.
The other consequence of this huge electricity usage, of course, is that it is very bad for the environment.
Around 70 per cent of the world’s Bitcoin mining is carried out in China, according to data from the University of Cambridge’s Centre for Alternative Finance.
Miners tend to use renewable hydropower energy during the summer rainy season, but fossil fuels for the rest of the year.
This leads to Bitcoin having a carbon footprint the size of one of China’s 10 largest cities, a fact that has long been one of the biggest concerns about its viability as a currency of the future.