Bitcoin energy concerns are being addressed: Early Coinbase investor

Ron Conway, founder and co-managing partner of SV Angel and an early Coinbase investor, joins “TechCheck” to discuss comments from Tesla CEO Elon Musk that caused the price of bitcoin to tumble. Subscribe to CNBC PRO for access to investor and analyst insights on crypto and more: https://cnb.cx/2BT2E7y

Elon Musk’s decision to stop Tesla from accepting bitcoin as payment has led to fresh scrutiny of the cryptocurrency’s environmental impact.

Musk said Wednesday that Tesla had halted purchases of its vehicles with bitcoin due to concerns over the “rapidly increasing use of fossil fuels for bitcoin mining.”

He alluded to data from researchers at Cambridge University which shows bitcoin’s electricity usage spiking this year.

Tesla won’t sell its bitcoin — the automaker is sitting on $2.5 billion worth of the digital coin — and Musk said it intends to resume transactions with bitcoin once mining “transitions to more sustainable energy.”

“We are also looking at other cryptocurrencies that use [less than] 1% of Bitcoin’s energy/transaction,” he said.

Musk’s comments roiled cryptocurrency markets, which have shed as much as $365.85 billion in value since his tweet.

Why is Musk worried?

Critics of bitcoin have long been wary of its impact on the environment. The cryptocurrency uses more energy than entire countries such as Sweden and Malaysia, according to the Cambridge Bitcoin Electricity Consumption Index.

To understand why bitcoin is so energy-intensive, you have to look at its underlying technology, the blockchain.

Bitcoin’s public ledger is decentralized, meaning it isn’t controlled by any single authority. It’s constantly being updated by a network of computers around the world.

So-called miners run purpose-built computers to solve complex math puzzles in order to make a transaction go through. This is the only way to mint new bitcoins.

Miners do not run this operation for free. They have to shell out huge sums on specialized equipment. A key incentive of bitcoin’s model, known as “proof of work,” is the promise of being rewarded with some bitcoin if you manage to solve its complex hashing algorithm.

It’s worth noting that dogecoin, which has risen wildly in price lately on the back of support from Musk, also uses a proof-of-work mechanism.

Carol Alexander, a professor at the University of Sussex Business School, explains that bitcoin’s mining “difficulty” — a measure of the computational effort it takes to mine the cryptocurrency — has been going “up and up” over the last three years.

“More and more electricity is being used,” Alexander told CNBC. “That means that the network difficulty will also be going up (and) more miners are coming in because the hash rate’s going up.”

Bitcoin’s price has risen almost 70% so far this year. As it goes up in price, the revenue to miners also increases, incentivizing more participants to mine the cryptocurrency.

Meanwhile, Musk isn’t the only one who’s worried about the environmental impact of bitcoin. In February, Treasury Secretary Janet Yellen warned that the digital coin is “extremely inefficient” for making transactions and uses a “staggering” amount of power.

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