Could Bitcoin Become an ESG Portfolio Mainstay?
ESG proponents have emerged as Bitcoin critics, arguing that the high energy consumption of Bitcoin mining is harmful to the environment.
While Bitcoin’s energy usage is something that the Bitcoin industry must address, Bitcoin ticks more ESG boxes than many of its critics realize though.
Growing Bitcoin Adoption Means More Energy Consumption
So let’s start with the E in ESG for Bitcoin:
Since Bitcoin emerged in 2009, millions of people and businesses across the globe have adopted the cryptocurrency. Some as a store of value or a speculative asset. Others as a remittance rail or an alternative currency.
Even institutional investors, who initially shunned the “magic internet money,” have started adding Bitcoin (BTC) to their portfolios. For example, through investment vehicles such as the Iconic Funds Physical Bitcoin ETP (XBTI).
Numerous publicly-traded companies, including MicroStrategy, PayPal, Square, and Tesla, have also gone down the Bitcoin rabbit hole, driving the cryptocurrency’s market capitalization to almost a trillion dollars as of December 2021.
This success of Bitcoin, however, comes with a price.
To process transactions and verify the integrity of the Bitcoin network, Bitcoin miners deploy computing power to solve difficult cryptographic puzzles. In exchange for keeping the network running securely, miners receive Bitcoin transaction fees and new units of Bitcoin. This process is known as a Proof of Work (PoW) and requires a high amount of computing power and energy.
Bitcoin and Concerns About its Impact on the Environment
A report by The New York Times claims that Bitcoin mining consumes 91 terawatt-hours (TWh) of electricity annually. This would amount to 0.5% of global electricity usage. That is more than the amount consumed by Finland.
Before the cryptocurrency mining ban in China, two-thirds of Bitcoin mining activities took place in the People’s Republic. There, coal was one of the main energy sources. This left a high carbon footprint from Bitcoin mining in the region.
Now that miners have relocated, concerns are that this may increase the carbon footprint in those regions too. Additionally, figures like Bill Gates and U.S. Treasury Secretary, Janet Yellen, have raised concerns about Bitcoin’s impact on the environment.
These concerns aren’t entirely without merit. However, the Bitcoin energy consumption figures often cited in mainstream media don’t indicate the amount of energy coming from renewable energy sources.
Also, the consumption of energy isn’t bad in itself. As a species, we strive, cognizant of it or not, to increase energy generation and output. Only through increasing our ability to create and harness energy is humanity able to evolve.
The issue is the source of energy. If we increase our energy generation and output by 100x, and it’s all renewable, the world is in a better place.
Through Bitcoin, where low-cost, renewable energy is paramount to mine it successfully, we finally have aligned the right incentives for the free market to develop completely sustainable energy sources for a capitalist monetary reward, Bitcoin.
In our opinion, Satoshi Nakamoto and Bitcoin will do more for the green energy movement than any government or climate activist ever has or will.
Bitcoin Mining Uses a High Renewable Energy Mix
According to an estimate by the Bitcoin Mining Council, 56% of the energy used in mining Bitcoin comes from renewable energy sources.
Most of the operational cost for mining is covered by electricity. Since renewable energy presents a low-cost alternative to coal, mining companies have an incentive to make the switch.
Earlier in December, Blocks and former Twitter CEO, Jack Dorsey announced a $10 million fund, Square’s Bitcoin Clean Energy Investment Initiative, that will support companies that help Bitcoin mining to become carbon neutral.
What’s more, the Crypto Climate Accord, a partnership between Rocky Mountain Institute, Alliance for Innovative Regulation, and the Energy Web, is implementing plans to ensure the cryptocurrency industry becomes 100% carbon neutral by 2030.
Furthermore, a recent study by the Frankfurt School of Finance has found that Bitcoin’s carbon footprint is actually a lot lower than many “experts” claim.
The study titled ’The Carbon Emissions of Bitcoin From an Investor Perspective’ states: “For comparison, the most recent estimate of the total yearly carbon footprint of the world is 45,873.85 MtCO2eq. This leaves Bitcoin with a total footprint of 0.08% of worldwide CO2eq.”
Bitcoin Mining Consumes Excess Energy
Bitcoin mining is also helping the oil industry reduce emissions by making use of their unwanted by-products for power generation.
Oil companies typically flare unwanted natural gas that comes from drilling, releasing over 400 million metric tons of carbon dioxide equivalent (CO2e) emissions each year, according to TrackInsight. As reported on Reuters, many oil companies are now supplying crypto miners with natural gas for a small amount or sometimes free. Denver-based Crusoe Energy Systems, for example, is one of such companies using natural gas.
US-based Great American Mining helps oil companies monetize unwanted gas by converting it to power Bitcoin mining operations. This enables Bitcoin to be mined at a low cost with low emissions while profiting oil companies in the process.
It’s also important to highlight that we overproduce energy on a global scale. Around 50,000 TWh per year is wasted annually. Therefore, Bitcoin mining only amounts to 25 basis points of wasted energy.
In light of Bitcoin’s overwhelmingly positive effect on society, the monetary network’s comparatively small energy expenditure is absolutely worth it.
ESG Is About More Than Protecting the Environment
Bitcoin critics argue that the cryptocurrency would never make it into an ESG portfolio due to environmental factors. However, ESG investing goes beyond just the environment.
A lot of attention is on the “Environment” by Bitcoin critics while negating the aspects of “Social” and “Governance.”
A complete ESG investing strategy looks into a company’s environmental impact, employees relationship, human rights, gender and diversity, community relations, and governance structure.
Bitcoin’s decentralization, openness, accessibility, and censorship-resistance place it as one of the best contributors to Social and Governance.
People who live under repressive governments can easily access an open and inclusive, NON-exclusive monetary system. One that is free from political control. Simply by downloading a Bitcoin wallet and sending funds over the Internet. For example, the October 2020 End SARS campaign in Nigeria received donations from all over the world in bitcoin. This came in response to the Nigerian government freezing the bank accounts of campaign supporters.
Furthermore, research by Mastercard reveals that over 600 million unbanked people have a mobile phone. Bitcoin can reduce the unbanked population. Anyone with a smartphone, regardless of age, race, gender, or religion, can have access to the Bitcoin network. Migrants can easily send remittances in a less costly and faster way through Bitcoin and the Lighting Network. Also, with Bitcoin’s maximum supply capped at 21 million, citizens of inflation-hit regions can preserve wealth in a disinflationary currency.
Governance takes a new shape as Bitcoin has no board of directors, shareholders, or central authority of any kind. Open-source code governs Bitcoin and anyone can audit it.
As Green Bitcoin Mining Becomes the Norm, Bitcoin Could Become ESG Compliant
ESG proponents consider Bitcoin’s high energy consumption as their primary cause for concern. However, in a matter of time, this may no longer be the case.
The transition from fossil fuels to renewable energy is growing among Bitcoin miners. That should be no surprise, considering it’s a cheaper source of power in many parts of the world. As Bitcoin miners continue on this path, it will lead to more support for renewable energy development.
Bitcoin mining will likely support renewables more than any government or other initiative, ARK Funds and Square Crypto argue in a memo.
Bitcoin’s Lightning Network is also a promising solution that will reduce the workload of transactions on the main chain. By settling a large volume of transactions off-chain, the lightning network ensures Bitcoin is scalable and reduces its energy usage.
With contributions to the environment through renewable energy development, helping the unbanked gain financial inclusion, and providing a fair global monetary system, Bitcoin becomes the perfect model of an ESG investment.
In fact, once Bitcoin mining’s energy mix has gone 100% renewable, Bitcoin will in our opinion become by far the most ESG investment in the world.
About the Report “The Carbon Emissions of Bitcoin From an Investor Perspective”
In this study, the Frankfurt School Blockchain Centre addresses together with intas.tech one of the most impactful criticisms of Bitcoin — its electricity consumption. This study analyzes the current global CO2 footprint caused by the Bitcoin network and outlines a new approach to offset the CO2 emissions.
About Iconic Funds
Our mission is driving the adoption of crypto assets. As the bridge for investors to gain exposure to Crypto Assets, Iconic Funds’s licensed and regulated vehicles offer investors a menu of investment choices ranging from passive index exposure to actively-managed strategies. We are removing the technical risks of crypto investing by offering investors trusted and familiar means to invest in crypto at industry-leading low costs.
The marriage of state-of-the-art technology, innovative investment products, and uncompromising professionalism places Iconic at the vanguard of crypto asset management.
Recent Research Reports
- Cryptocurrencies and the Sharpe Ratio of Traditional Investment Models
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- Analyzing the Primary Value Drivers of Leading Cryptocurrencies
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- How Effective are Common Investment Strategies with Bitcoin?
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- Investigating the Myth of Zero Correlation Between Crypto Currencies and Market Indices
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For further information, please visit funds.iconicholding.com
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