Rai stones, one of the world’s most cumbersome forms of money, in Yap, Micronesia.
Rai stones, one of the world’s most cumbersome forms of money, in Yap, Micronesia. Credit: Michael Runkel / Alamy

Money is mysterious. Despite their efforts, economists find it even more confounding than civilians do. Is it a debt or a contract? Is it a mutual fantasy or a token of desire? Does it represent work or goods, or something else altogether? Nobody knows. Almost anything can act as a currency, and different cultures have used meteorites, live cows, salt, iron ingots and bat hair with success. When, in 1986, the economist Hyman Minsky said “everyone can create money; the problem is to get it accepted”, it was an insight that had already been proven true for millennia.

Perhaps the most cumbersome form of money ever used comes from the tiny islands of Yap in Micronesia. For hundreds of years, the Yapese have used huge round stones called rai as a currency, and they are still used for some transactions today. The limestone used came from the neighbouring island of Palau and the journey back, with a stone-laden canoe, was treacherous and sometimes fatal. Rai were too big to move easily once on land, so instead, their ownership was recorded through an oral record of transactions. This unique tradition has become a favourite predigital analogy for how bitcoin works.

This “original bitcoin” label has its limits – rai are part of a complex system of ritual exchanges, and were never Yap’s sole currency – but it is still illuminating. Rai were very difficult to mine, which ensured they had a scarcity value. After a certain point, no more were made, and their use and exchange was recorded by a mutually understood, distributed ledger. Substitute computers for canoes, and a string of alphanumeric characters for both the stone and the ledger, and we have a working model of what bitcoin is, and what it is supposed to do. “Bitcoin only uses energy because the market values that application of energy. You don’t seem to get the same criticism of other industries. We choose to play Xbox and watch Netflix, instead of playing board games and reading books.”

This mining process that creates bitcoin is a computerised, “proof-of-work” process, and it has become one of the most bitterly contentious elements of the controversy around cryptocurrency. Instead of hard labour, the energy used to mine bitcoin and other cryptocurrencies comes from electricity, and most of that electricity still comes from fossil fuels. At the dawn of the bitcoin era, it was possible to perform proof-of-work processes with an ordinary laptop. As bitcoins have become rarer and more valuable, this work now requires specialised bitcoin mines – vast racks of power-hungry, purpose-built supercomputers to crunch algorithms.

These mines are concentrated in places such as Texas, Kazakhstan and Iceland, but can be found where power is cheap or regulations lax.

Cumulatively, the world’s known crypto mines consume as much energy as a small country. Exactly which small country is debated – different estimates have cited Jordan, the Netherlands, New Zealand, Switzerland or Argentina.

“There has been a great waste of resources consumed by cryptocurrency mining,” says Dr Hai Dong, the deputy director and co-founder of CloudTech-RMIT Green Cryptocurrency Joint Research Laboratory, also called GreenCryptoLab. “Bitcoin’s total annualised carbon footprint is 64.44 million tons, equivalent to the carbon footprint of Serbia and Montenegro.” Annually, bitcoin alone consumes about 0.59 per cent of the world’s electricity production, and leaves behind as much e-waste as Luxembourg.

These estimates are made more difficult by secrecy. “It’s almost impossible to find a single company that releases an annual report saying, ‘We consumed 100 terawatt hours of electricity,’ ” says science writer and journalist Ketan Joshi. While it is common in other industries, such as telecommunications, to report energy use, it is almost unheard of in crypto. “Companies refuse to actually say exactly how much power they use, but it has to be quite substantial,” Joshi says. Illegal or semi-legal mining clouds the picture further. “There’s huge gaps in a lot of the data. It’s a parsimonious explanation to say that the reason that we have all these funny numbers is there’s just a lot of secretive mining going on.”

Crypto mining also contributes instability and further management complexity to large energy grids. In November 2021, Kyrgyzstan shut down nearly 2500 illegal crypto mines, and seven months later Texan authorities asked crypto miners to voluntarily close their operations. Almost all complied with this effort to help maintain supply during a heatwave. Foremost in what the Financial Times called the “moral case against crypto” are the carbon emissions. As the world tries to avoid two degrees of warming, blowing the climate budget on imaginary digital money seems not merely socially wasteful, but environmentally irresponsible, even suicidal.

The United States Treasury secretary Janet Yellen singled out bitcoin as “an extremely inefficient way to conduct transactions”. Even cryptocurrency boosters such as Elon Musk have been critical: in a tweet he “suspended vehicle purchases using bitcoin” at Tesla because of concern over “rapidly increasing use of fossil fuels for bitcoin mining”. Musk makes frequent, sometimes conflicting statements on crypto, especially dogecoin (he has been called “The Dogefather”). These whims can send the value of the coins he mentions soaring or tumbling.

More climate-conscious alternatives to bitcoin have been designed. The token’s leading competitor, Ethereum, uses a “proof-of-state” model that is much less energy intensive, partly for environmental reasons. Renewables-driven mining of bitcoin is another emerging strand of the so-called “green crypto” movement.

Green crypto also has a strong Australian contingent. On the outskirts of Byron Bay, Mawson Inc is planning one of the world’s largest solar-powered bitcoin mines. In Western Australia, Powerledger, a company co-founded by Dr Jemma Green, uses blockchain technology to certify the provenance of renewable energy. Two brothers from Sydney’s North Shore, Dan and Will Roberts, are the co-founders and co-chief executives of Iris Energy, one of the most valuable green crypto companies in the world. After a short stint of trading in the 2010s, they had dismissed bitcoin as “nonsense, silly magic internet money”, before returning in earnest.

Dan Roberts believes bitcoin is sometimes used as an environmental scapegoat. “Bitcoin only uses energy because the market values that application of energy,” he says. “You don’t seem to get the same criticism of other industries. We choose to play Xbox and watch Netflix, instead of playing board games and reading books. Fireworks, Christmas lights – there’s a lot of discretionary uses of energy. I think that’s something that gets lost.” Jemma Green agrees. “Energy consumption of traditional financial services – banking, goldmining and cash manufacturing – should be getting the same attention that blockchain’s energy consumption is getting.”

Jemma Green believes crypto may in fact lead to more energy-efficient alternatives to traditional financial transaction systems in the future. In particular, she believes the blockchain technology behind bitcoin and other crypto tokens will have strong environmental benefits. “Energy consumption of blockchains should not be singled out but should be viewed in context with industries it will support, augment or replace,” she says. “Blockchains are getting dramatically more energy efficient, on par with cloud computing. They can support development of energy tracking overall and support renewables integration more specifically.” Iris Energy has pioneered just this kind of integration, using crypto mining as a “demand-side battery” that helps mop up power surges from renewables.

For the sceptics, crypto’s environmental credentials are another in a long line of unfulfilled promises.

“There’s this frequent idea that crypto mining inherently incentivises renewables,” says Ketan Joshi. “And that’s just not true. It inherently wants to demand as much electricity as possible. Bitcoin mining is causing a huge problem, and then offering a slightly reduced version of that problem.” In the near future there will be enough real-world examples to end the debate. In the dying days of the Morrison government, a senate inquiry into crypto recommended a 10 per cent tax benefit for crypto miners using renewables, a measure that is likely to be retained. We will find out soon, and we will find out here as the market comes under closer scrutiny by politicians and regulators.