Bitcoin has generated plenty of headlines owing to its volatile nature, most recently thanks to Tesla’s purchase of $1.5 billion worth of the stock and subsequent comments from Elon Musk. Now the news attention is turning to focus more on the cryptocurrency’s significant energy use – the Guardian being one such news outlet to report that Bitcoin mining consumes more energy than entire countries. So we consider…for those who wish to invest responsibly with environmental, social and governance (ESG) considerations at the forefront, is this technology suitable?
Before we get into it, let’s define what Bitcoin actually is. It is a digital currency (or ‘cryptocurrency’) that offers lower transaction fees than traditional online payment methods. Unlike government-issued currencies (the British pound, US dollar etc), it is operated by a decentralised authority. Learn more here.
Bitcoin’s potentially positive ESG factors…
On the surface, the proposition from Bitcoin to democratise financial markets by removing intermediaries certainly does have its social advantages. For example, reducing the cost of remittance corridors between richer and poorer countries, through which migrant workers send funds home to their families, feature within the UN’s Sustainable Development Goals (SDGs). In addition, the anonymity that Bitcoin and other cryptocurrencies provides can give security to those under oppressive regimes or provide a level of privacy to users that is being eroded in these digital times.
…versus its negative ESG factors
This decentralised monetary model reliant upon advanced cryptography comes at a significant environmental cost. As widely reported, Bitcoin’s estimated annual power consumption matches that of various countries around the world; recent analysis from Digiconomist puts Bitcoin’s annual energy consumption just behind that of Chile. More significantly, with two-thirds of mining taking place in coal-heavy regions like China where energy costs are subsidised, the resultant carbon footprint is huge. Over the long term, it is difficult to see how this is consistent with a transition to a low carbon economy.
In addition, Bitcoin needs to work on shedding its shady reputation amongst financial regulators that its design prioritising anonymity means it has historically been used online to facilitate money laundering and financed criminal activity that undermines social institutions. Just last month headlines such as this one by The Times reported European Central Bank President Christine Lagarde’s call for regulation to address ‘funny business’ associated with the cryptocurrency. Although still not anywhere near as significant as the use of conventional cash for these purposes in the offline world today, its use as a digital currency used predominately online makes this comparison seen as less relevant to these gate-keepers. This is changing as more transactions take place on formal exchanges that have anti-money laundering and “Know Your Customer” (KYC) procedures in place, but recent comments by the Biden administration show that this opinion remains a headwind.