How to invest in crypto without destroying the planet
Bitcoin is not sustainable. Despite claims that the cryptocurrency utilizes renewable energy, researchers have found that Bitcoin continues to primarily use fossil fuel sources to power mining efforts — so much so that Bitcoin has a carbon footprint roughly equal to the entire country of Morocco. So while investing in the cryptocurrency may be good for your bottom line, depending on how favorably Elon Musk is tweeting about it on any given day, it is always terrible for the environment.
But not all cryptocurrency is created equal. While much has been made about the environmental impact of Bitcoin and other heavy energy consumers like NFTs, there are methods to make cryptocurrency and other digital assets more sustainable. Some, like Ethereum, have plans to shift toward a more environmentally-friendly model in the future, while others have put considerations of environmental impact and energy consumption front and center from the start.
If you're looking to invest in cryptocurrency, environmental impact should factor into your decision. So how do you identify which cryptocurrencies are actually sustainable? Read on.
How to identify sustainable cryptocurrencies
Backers of all cryptocurrencies, including Bitcoin, will often tout how environmentally friendly their particular coin is. But it's important to remember that many of these people also have vested interests in what they are pitching. In order to truly decide which cryptocurrency you want to back, you'll want to do digging yourself.
So what should you look for to determine just how eco-friendly a coin truly is? Alex de Vries, the founder of Digiconomist and a data scientist focusing on financial economic crime for De Nederlandsche Bank, says that people should first and foremost be mindful of how coins are mined.
A quick crash course in crypto: Most cryptocurrencies operate on a blockchain, which is a distributed ledger that acts as a constantly updating account of all activity. Purchases, sales, trades, the release of new coins — all of it is tracked on the blockchain. This ledger is typically distributed across tens of thousands of computers; the information isn't kept in a centralized location, like how a bank operates. In order to confirm every transaction as legitimate, there must be a consensus reached across the blockchain. That can be reached a number of ways through a consensus algorithm, which is commonly associated with the mining process.
"A proof-of-stake network can require 99.95% less energy than a proof-of-work network."
Bitcoin, the most popular cryptocurrency, uses a mining process known as proof-of-work mining. This process requires miners to lend the computing power of their machines to solve encryption — essentially a series of difficult-to-decipher codes that get increasingly harder and more resource-intensive over time. Because so much effort is required to contribute to this process, it is extremely unlikely that anyone would attempt to manipulate it. It's a security feature, but it is also the reason that Bitcoin uses up so much energy.
Other cryptocurrencies use something called proof-of-stake. This process requires miners to stake their own shares of cryptocurrency in order to validate a transaction, rewarding those who provide accurate information and penalizing those who provide false information. "The block creation process depends on wealth rather than computational power, so there's no incentive to use energy-hungry hardware at all," de Vries explains. "A proof-of-stake network can require 99.95% less energy than a proof-of-work network."
There are other alternatives out there as well. Leigh Matthews, head of research at LeafScore, tells Mic that there are many factors to consider, but "as a basic rule of thumb, a proof-of-storage, proof-of-stake, or block lattice cryptocurrency is going to be less energy intensive than a cryptocurrency that relies on a proof-of-work algorithm."
Each method has its pros and cons. For example, de Vries warns that proof-of-storage can incentivize overuse of hard drives by requiring miners to dedicate memory to solve encryption equations, which can lead to e-waste problems as miners burn through physical storage. But if a cryptocurrency uses proof-of-work, you should pretty much eliminate it from consideration if you are worried about the planet. "There's no energy-efficiency economy of scale for [a proof-of-work] network," de Vries says.
Consider the energy source
While the mining process is the most important factor to consider when selecting a cryptocurrency that is environmentally friendly, it's worth taking into account where miners are drawing their energy from in the first place. Bitcoin backers have pushed a misguided claim that the cryptocurrency is driven largely by renewable resources, which research suggests isn't true. But even if it were, the reason Bitcoin miners are drawn to clean energy is not because they care about the planet — it's because it's a cheap energy source. And proof-of-work mining tends to burn up that energy fast.
"Even a [proof-of-work] crypto that uses renewable energy is still typically diverting that energy away from where it could otherwise be used, such as to power homes," Matthews notes. "That means more energy is needed overall to power the grid. We shouldn't forget in all this that while renewable energy itself is renewable, creating solar arrays, wind turbines, hydroelectric, and so forth requires a lot of material investments that also take a toll on the environment."
Also, it's worth noting that it's incredibly hard to know exactly where a decentralized collection of computers and miners are drawing their power from. Large mining operations can be accounted for, but smaller operations are trickier — so when you see a claim saying that a cryptocurrency uses lots of clean energy, be skeptical. "How you prove that a Bitcoin or other discrete token was mined using renewable energy may become simpler and more commonplace now there's more focus on this aspect of the industry. But for now it remains rather difficult to determine," Matthews explains.
Don't be fooled by greenwashing
With environmental impact on many people's minds now, there is a renewed effort to try to highlight "green" efforts. But just like when massive oil corporations make promises to reach net-zero carbon emissions, there is plenty of reason to be suspicious about these claims. "Just because a coin's founders or super-fans say it's 'green' or offer up comparisons to Bitcoin doesn't make it so," Matthews says. "There are a lot of numbers floating around the internet purporting to be energy calculations for individual cryptos, but many of these are unsubstantiated and misleading."
De Vries also notes that sometimes, these things are a matter of scale. A cryptocurrency claiming to have a much smaller footprint than Bitcoin may just have a much smaller market capitalization. If it goes "to the moon," as the memers all say, that environmental impact will skyrocket too. "If these systems are equal value, they will have similar impact," he explains, "so investing in a smaller proof-of-work asset isn't a solution."
Sustainable coins to consider
With all that in mind, what are some cryptocurrencies that legitimately seem better for the Earth? Well, new cryptocurrency projects are being developed every day, and new demand for environmentally friendly alternatives will likely surface more. But in the meantime, we've got a few below that have put climate concerns front and center.
Two quick notes: This is not investment advice. And as Matthews says, "with more than 4,500 cryptocurrencies currently trading, picking out just one or two is asking for trouble."
If Bitcoin actively incentivizes the use of energy resources through its proof-of-work mining process, SolarCoin is the exact opposite. This cryptocurrency generates new coins for every megawatt hour generated from solar technology, rewarding miners for using the renewable energy source. It's a startup, and there are some questions about it — it requires users to upload documentation of energy generation in order to receive coins, and it is not currently a widely traded cryptocurrency. But in terms of projects that put the environment first, SolarCoin is hard to beat.
It's best to think of Stellar as a sort of PayPal alternative. This cryptocurrency project seeks to help users move money between digital currencies and more traditional financial institutions. It uses its own coin, Stellar Lumens, to facilitate these transactions, and it uses a method of consensus algorithm with a small carbon footprint to do it. Stellar uses its proprietary Stellar Consensus Protocol (SCP), which uses trustworthy sources that essentially vote on whether information on the blockchain is correct or not. Instead of requiring the entire network to come to a consensus, the process only requires a few sources to agree, making it faster and less energy-intensive.
Cardano is considered to be the world's first peer-reviewed blockchain, and it has marketed itself as being a much more capable alternative to Bitcoin because of its ability to process thousands of transactions per second. It also uses a proof-of-stake mining process, which requires considerably less energy to process each transaction than proof-of-work. Cardano is open-sourced and streamlined, and has a pedigree worth noting as it was developed by Charles Hoskinson, the co-founder of Ethereum. In terms of transparency, Cardano is hard to match.