During the California Gold rush in the mid-1800s, successful mining of the precious metal required a lot of power — manpower.

That’s why California’s population surged more than 30X from 1849 to 1852. Demand for labor was higher there than anywhere else in the world. People went after opportunity.

Fast forward 170 years later and massive power needed to mine a scarce resource again is a noticeable trend. So much so that some of the smartest people on the planet are talking about it, such as Tesla (NASDAQ:TSLA) founder Elon Musk.

In our digital age, the resource is digital… bitcoin.

And the mining power is no longer manpower but computing power. Mining computers use electricity… lots of it.

That must make bitcoin bad for the environment, right?

That idea has contributed to the original cryptocurrency being cut in half from its April highs, but it’s not as simple as it seems.

Here’s what you need to know about mining bitcoin and other cryptocurrencies, its environmental impact, and its effect on their potential as investments…

I think Elon Musk is a brilliant visionary. I have been a fan of his for a long time, also realizing that he can go off the beaten path at times.

Musk recently changed his tune on bitcoin in just a matter of months. A central part of this puzzling shift was bitcoin mining’s impact on the environment.

Back in February, Tesla announced it had bought $1.5 billion worth of bitcoin to “further diversify and maximize returns on our cash.” In addition, the company broke new ground by announcing it would accept bitcoin as payment for its vehicles.

Pretty bullish, right?

Well, earlier this month, he tweeted:

“Tesla has suspended vehicle purchases using 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.

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.

Tesla will not be selling any Bitcoin and we intend to use it for transactions as soon as mining transitions to more sustainable energy. We are also looking at other cryptocurrencies that use <1% of Bitcoin’s energy/transaction.”

Let’s clear up some of the confusion.

First, this concern does not apply to all cryptocurrencies.

There are two main blockchain systems used for verification. One is “proof of work,” which is the original mechanism. It is used by bitcoin and the first iteration of Ethereum, among others. It does indeed require massive computing power to mine new coins.

The other mechanism is “proof of stake.” It is newer and powers many new altcoins (cryptos other than bitcoin). Longtime MoneyWire readers know that as bullish as I am on bitcoin, I expect even bigger gains from these smaller, lesser-known altcoins that haven’t gotten 1/100th the attention bitcoin has.

We don’t need to go get all technical on the differences between the two mechanisms. The important point is that newer proof-of-stake systems use much less energy.

Still, bitcoin is the biggest and best-known cryptocurrency, so let’s look at proof of work systems and if the problem is really that bad. If you just read the headlines, you might be surprised.

According to a University of Cambridge study, more than three out of four proof-of-work miners use renewable energies as part of their energy mix — 76% to be exact. ARK Invest also produced a white paper that came to the same conclusion. What’s more, 39% of all proof-of-work mining is already through renewables.

Older fossil fuels are the big concern, as they are bad for the environment. Well, look at the breakdown of power sources for mining facilities:

• 62% hydroelectric (renewable)
• 38% coal (fossil)
• 36% natural gas (clean)
• 17% wind at 17% (renewable)

That doesn’t seem like the big drawback it’s made out to be, does it?

Plus, I expect bitcoin will boost a move to renewables. Money talks, and renewables are cheaper. Like every other company, mining companies want to increase profit margins by reducing costs. Energy is probably their largest overhead expense, so you know they will embrace the chance to save.

Others have said this as well. Square (NYSE:SQ) was one of the first big companies to own bitcoin, and makes it easy to buy and sell through its Cash app. Back in April, before Elon Musk’s latest tweet, CEO Jack Dorsey tweeted a link to a white paper called “Bitcoin is Key to an Abundant, Clean Energy Future.” He said that “bitcoin incentivizes renewable energy.”

Musk responded: “True.”

So I’m not sure what happened to change his mind, but this move to renewables is already playing out.

Riot Blockchain (NASDAQ:RIOT) is one of the largest bitcoin mining companies in the U.S. At its operation in Massena, New York, 88% of the electricity generated is from zero-emission sources. This creates a low carbon footprint, and it also lowers costs and average daily temperature, which boosts profitability and helps the mining computers last longer.

We’ve focused on the miners, but blockchain is disrupting our whole energy grid and helping take us into a future of cleaner energy. Residents of the Park Slope area of Brooklyn are already benefiting from a project called the “transactive grid.” Those with solar panels can sell power to the energy companies… and keep track of every transaction on the blockchain.

In typical blockchain fashion, the energy distribution is moving from a centralized grid run by a handful of utility companies to a decentralized grid owned by individuals. The ability for businesses and homeowners to buy and sell energy will soon be the new normal.

It’s why I say blockchain will change almost everything — how you search for things online, buy goods and services, borrow money, heat your home, buy a house, vote, pay your taxes, and more.

It’s also why I say that buying altcoins right now is like backing great software makers — Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG,NASDAQ:GOOGL), Uber (NYSE:UBER) or Oracle (NYSE:ORCL) — in the early days.

I believe that investing in the best altcoins right now is like with Bill Gates’ Microsoft in 1986… just before the world went wild for its productivity-enhancing software and shares skyrocketed.

On the date of publication, Matthew McCall did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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