Bitcoin has been on something of a rollercoaster ride in the last few months and investors would be forgiven for feeling like they have developed crypto whiplash from the highs and lows.
However, there seems to be one constant – Bitcoin’s burgeoning reputation as “dirty currency”. And with investors in 2021 more ESG-aware than ever, will environmental concerns be what brings down the world’s top digital currency?
Bitcoins are created by people use high-powered computers to solve complex problems to guess a random number thus releasing the cryptocurrency.
This ‘mining’ – as the process the blockchain uses to generate new bitcoins and verify transactions is called – becomes profitable when the value of the new bitcoins is more than the cost of the power used to mine them.
It is deliberately energy-intensive so that it is prohibitively expensive for hackers to attack the bitcoin network.
The cryptocurrency’s perceived negative impact on the environment is due to the amount of energy it takes to produce bitcoin.
Bitcoin mining consumes about 113 terawatt hours of power a year, around 0.58% of the world’s energy production. (Cambridge University’s Bitcoin Electricity Consumption Index)
If Bitcoin was a country, it would rank as 29th in the world for energy consumption. It is not just the amount of energy that is of concern but the type. The fear is bitcoin miners are driving the use of polluting fossil fuels, such as coal-fired electricity, in certain countries.
Globally, China mines by far the most bitcoin (65.08% as of last April) with the US a distant second at 7.24%.
China has said it would crack down on crypto mining and trading. President Xi Jinping is committed to a drastic reduction in the country’s carbon dioxide output but extensive cryptocurrency mining in certain regions has led to the unofficial reopening of unsafe coal mines to fuel the demand for power, endangering lives, and the environment.
In the US, a New York state Senate bill says the energy consumption of the computers used in ‘mining’ of Bitcoin threatens the state’s compliance with the Paris Agreement, the international treaty on climate change.
Billionaire Bill Gates has come out strongly against the cryptocurrency’s energy consumption saying: “Bitcoin uses more electricity per transaction than any other method known to mankind. It’s not a great climate thing.”
In addition to the power required to mine bitcoin, mining ‘rigs’ – the computers – generally becomes obsolete every 18 months, thus contributing even more environmentally damaging tech landfill.
It is reported that the energy being used is increasingly from renewable sources, indicating cryptocurrencies may be more sustainable in the future.
Miners could also bring a boom to areas with a lot of freely available renewable energy through their economic migration.
However, at present it is mostly hydropower being utilised which stands accused of causing its own environmental and social problems, such as damaging habitats and water quality.
Crypto exchange platform Coinbase says: “While Bitcoin’s energy consumption is significant, that doesn’t automatically equate to it being a meaningful driver of climate change.”
It also asserts three-quarters of miners “already use renewable energy as part of their energy mix”.
In addition, researchers for Cambridge University’s Bitcoin Electricity Consumption Index have found that “Bitcoin’s environmental footprint currently remains marginal at best”.
It also noted the energy needed to mine a block is “expected to decrease every 4 years due to a process known as the halving, where new Bitcoin issuance is cut in half.”
There are moves to clean up cryptocurrency, including Square’s Bitcoin Clean Energy Investment Initiative, a $10 million fund for companies making bitcoin mining more energy efficient.
In a word, no.
From an investment standpoint, the extreme volatility of cryptocurrencies makes them a dubious option.
Tesla entrepreneur Elon Musk’s recent market-moving comments on several cryptocurrencies on social media have inflated – and crashed – the market.
It confirmed fears that crypto is as vulnerable to possible manipulation as expected while the majority still remains under the control of a very small number of people.
It should be noted Musk also highlighted the environmental impact of bitcoin mining saying: “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.”
Adding Bitcoin to a portfolio will make it less green at a time when more clients are looking to investing in socially responsible ESG funds.
Even if that was of no concern to an individual investor, our position on cryptocurrencies remains the same.
We are sceptically watchful and have taken the last couple of weeks’ ‘excitement’ as confirmation our current stance is the correct one for our clients and our firm.
We would advise against investing in such unstable markets. We will continue to keep a close eye on the evolution of cryptocurrencies while providing true financial planning and lifetime cash flow strategies to provide comfort and confidence for our clients.
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