Few investment trends have captured the broader imagination in the same way that bitcoin has. Similarly, few investment rules have overtaken institutional investment strategy as rapidly as ESG -- or environmental, social and governance -- guidelines have.
Unfortunately for bitcoin fans, these two trends appear at loggerheads.
Detailing the Damage
The environmental harm of bitcoin and its mining is by no means a novel discovery. Quantifying the damage, however, is difficult. After all, terawatt hours are not a common unit of measure for most people.
As a simpler reference, the University of Cambridge's bitcoin Electricity Consumption Index estimates that the bitcoin industry consumes about as much electricity as all of the refrigerators in the United States. That is considering a cut in mining activity both as a result of price decreases and shutdowns in bitcoin's most popular mining destinations like China.
Still, energy consumption spent on mining bitcoins is only slated to increase by the cryptocurrency's very design. As only 21 million coins are ever supposed to be available, the system gradually increases the computing power needed to mine a single coin as supply tightens so as to not make all coins immediately available.
In terms of the actual use cases, bitcoin's status as purely an investment does little to assuage worries of wasteful energy use. Meanwhile, the idea of use bitcoin as a currency is distressing to environmentalists as well. Per a Statista estimate released earlier this week, one bitcoin transaction uses over 10 times as much energy as 100,000 swipes of a Visa (V) card.
"At the time bitcoin was structured, it didn't use much energy, the number of users was small, and climate change wasn't exactly an everyday, headline issue yet," Sudhir Roc-Sennett, Head of Thought Leadership and ESG at Vontobel Asset Management, told Real Money. "So it's a new and big problem for bitcoin. There's just no way around the fact that it is a carbon-expensive thing to do."
In that sense, the "E" and "S" of ESG seem hard to marry with the secular shift professed by so many bitcoin evangelists.
Assessing Opportunity Costs
Yet, Roc-Sennett was quick to note that out-of-context assessments of environmental impacts are, at best, misleading. In the end, he clarified, one must take stock of the opportunity costs associated with bitcoin's environmental impact.
"It's really down to whether the energy is surplus or not," he explained. "If there really isn't an opportunity cost in utilizing energy for bitcoin mining, miners can generate some income and then pay tax on the income...that would really be a benefit."
Roc-Sennett added, however, that the power used would need to be renewable in itself. The negative indirect costs generated by use of fossil fuels like coal to mine bitcoin, regardless of their surplus nature, would obviously not be compatible with general ESG standards.
The arguments presented by Roc-Sennett support the idea that bitcoin can tap into "stranded" energy assets, or assets that are simply untapped by other industries and therefore wasted. In this sense, common resources are being used and, so long as they do not befall a "tragedy of the commons" scenario and are not inherently environmentally damaging, bitcoin is not a burden on the economy nor is it a burden on society.
Further still, some argue that even the use of some fossil fuels are worthwhile as they are emitting carbon dioxide to absolutely no end in the present system. Blaine Townsend, Senior Vice President & Director, Sustainable, Responsible and Impact Investing at Bailard, cited the practice of burning excess natural gas emitted as a byproduct of oil exploration, known as flaring, as a key example.
"Not only is bitcoin heading down the aisle with energy asset owners, but it could also have a hand in the reduction of gas flaring," he told Real Money. "The International Energy Agency calculated that in the year 2018 this gas flaring released about 275 million metric tons of CO2 emissions. That's more than the carbon emissions of the entirety of Argentina."
By harnessing this gas surplus for bitcoin, Townsend estimates that both CO2 and other harmful emissions of volatile organic compounds can be cut dramatically, while actually doing something with the energy rather than burning it into the atmosphere.
Still, John Belizaire, CEO of Soluna Computing, a company that primarily seeks to use excess energy to power data centers, argued that bitcoin's still nascent stage leaves it vulnerable to use-case confusion.
"The technology does have a purpose, it is just yet to find its proper place in the world. People can still say, 'what is bitcoin really good for?'," he told Real Money. "Three percent of global energy is utilized by data centers, three times the amount used by bitcoin. The difference is that data centers have a clear purpose in society."
Belizaire surmised that once bitcoin can achieve the aims that its proponents have long forwarded, namely in upending the current financial system that itself is not overwhelmingly environmentally friendly, these qualms will be markedly quieter. The question that remains is how quickly it can overcome current questions about its true purpose.
Seeking a Solution
However, the endgame of shifting the conversation on bitcoin and therefore the crypto space more broadly in terms of environmental impact might necessitate an even more fundamental shift. In fact, the issue of environmental impact may actually push Bitcoin away from the very protocol that made it so popular in the first place.
David Blatt, CEO of financial advisory firm CapStack, told Real Money that a major paradigm shift is already in motion on the heels of amplified ESG importance.
"Many cryptocurrencies are now shifting from proof of work (PoW) that requires power to mine, to proof of stake that does not," he noted. "So we will start to see that become the norm as ESG is very front of mind, particularly for institutional investors that are beginning to adopt crypto."
The protocols cited by Blatt are worth elaboration. At present, bitcoin operates its distributed ledger technology via PoW, which employs mathematical and cryptographic puzzles to ensure peer-to-peer transactions can be performed sans an arbitrator. Additionally, it protects against sybil and denial of service attacks.
However, this system comes with an inherent flaw not foreseen at its institution.
"As the currency value and/or utility in a PoW network increases, the consensus mechanism can be problematic from a sustainability perspective," a recent paper from the UCL Centre for Blockchain Technologies explains. "This is because as the network becomes more popular and attracts more activity, the difficulty level of the cryptographic puzzle increases, causing higher energy consumption of the network."
As a result, many crypto enthusiasts are pursuing alternative authentication systems that might ultimately make ESG and crypto investors arrive at an agreeable solution. Proof of Stake, a method endorsed by Ethereum inventor Vitalik Buterin, may be one of the best ways to do this.
"Rather than computers simultaneously racing to the finish line to complete a puzzle, the proof of stake model assigns one validator to the computation who is rewarded with ether if successful," Bailard's Townsend explained. "With this newly-adopted proof of stake framework, researchers believe that energy consumption could drop massively to 1/10,000th of the amount needed currently."
The recent UCL study affirmed this optimistic outlook in its research model, while offering a critical message to the overall crypto industry.
"Applying this model to six different PoS-based [distributed ledger technology] DLT systems confirms the hypothesis and shows that their energy consumption per transaction is indeed at least three orders of magnitude lower than that of Bitcoin," the study concluded. "These results can be understood as an urgent call for the modernization of PoW systems and a shift towards PoS, as well as a recommendation to practitioners to consider appropriate, energy-saving hardware."
In a still-nascent industry, of sorts, that purports to change essentially the entire world, perhaps it should have been anticipated that the industry itself was likely to be in for a few of its own changes.