Assessment of Bitcoin carbon footprint

Abstract

Bitcoin is a breakthrough financial technology but a volatile asset in financial markets with a complex fundamental consensus algorithm (Proof-of-Work) limiting its large-scale adoption due to environmental-related issues. Hitherto, the role of its technical and infrastructural composition that drives carbon footprint from an ecological perspective is rarely discussed in the literature. Here, we use machine learning and econometric techniques to analyze the past, present, and future changes in Bitcoin's carbon footprint with daily data spanning July 18, 2010 to December 04, 2021. We document technical drivers, decomposition effects, causal nexus, and implications of the Bitcoin blockchain's increasing energy and carbon footprint. We show that Bitcoin's technical drivers could have potential impacts on Bitcoin's carbon footprint, and subsequently, global climate change. For example, the network's hashrate increases mining difficulty––thereby increasing Bitcoin's energy consumption and subsequently, carbon footprint. We observed a direct association between the marginal effect of block size and transaction count––implying that a higher block size improves transaction efficiency and then reduces Bitcoin's energy and carbon footprint. Besides, low mining difficulty increases market capitalization whereas increasing mining difficulty reduces bitcoin mining profit in the long run. This infers the reward for mining Bitcoin has a diminishing return in the long term. Thus, the adoption of advanced hardware for Bitcoin mining will spur energy and carbon intensity, yet will have a low return on investment. We highlight environmental regulations and regulatory changes that could limit Bitcoin's carbon footprint.