Are ESG fears curtailing bitcoin investing’s potential?

With environmental, social and governance (ESG) concerns over the mining of bitcoin [BTC] and other cryptocurrencies gathering pace, we ask how much energy crypto mining actually uses, whether institutions are staying away, and explore potential alternatives.

As bitcoin is mined using hugely energy-intensive supercomputers, the environmental impact is increasingly considered one of the most likely factors to scupper the longer-term price growth of bitcoin and other cryptos.

Since Elon Musk raised the overuse of fossil fuels in bitcoin mining just under a month ago, and announced Tesla [TSLA] was suspending bitcoin purchases, the bitcoin price has fallen 41.48% from $57,939.36 to $33,504.26, as of 1am BST on 9 June. Between 7 and 8 June, the cryptocurrency saw a decline of more than 10% of the decline in just 24 hours, based on Coindesk’s pricing. Bitcoin hasn’t finished a day above the $40,000 level since 20 May — as a reminder, bitcoin hit a record high of $64,829.14 on 14 April.

The Blockchain theme has moved down 0.62% on our performance scanner in the last week, placing it in the bottom 10 of 35 tracked themes (as of 9 June’s close).

 

How much renewable energy does bitcoin use?

Bitcoin mining already uses a significant amount of renewable energy, but pinpointing the precise figure is difficult and estimates vary. However, somewhere between 39% and 73% of bitcoin mining is powered by renewable energy, according to Weiss Ratings cryptocurrency analyst Alexander Benfield, who was interviewed by marketwatch.com last week.

Benfield points out that even the lower figure “is far higher than the percentage of renewable energy across the whole US power grid”, which means that “bitcoin is far more energy-conscious than the average industry.”

Bitcoin mining also uses excess energy that would otherwise go to waste — Benfield uses the example of bitcoin miners in rural China using hydro-electric energy that would otherwise be wasted as a result of low local energy demand.

 

Firms stay away from bitcoin over ESG worries

Only 10% of financial institutions that are interested in investing into bitcoin have done so, according to the Canadian investor and television personality, Kevin O’Leary, who cites ESG concerns as a major factor. While O’Leary reckons it’s “going to be a problem going forward”, it has also been an issue for more than four years, according to EY Blockchain’s Paul Brody.

He told Coindesk: “We have so many enterprise clients that care about this topic … [but] quite a few enterprise clients have held off on doing stuff in blockchain over their concerns about the carbon footprint.”

“We have so many enterprise clients that care about this topic … [but] quite a few enterprise clients have held off on doing stuff in blockchain over their concerns about the carbon footprint” - Kevin O’Leary

 

One mooted possibility is the introduction of a different type of bitcoin — a cleaner, more ethical version. Digital payments startup Square [SQ] is aiming for net zero carbon emissions by 2030 and in December, launched a Bitcoin Clean Energy Initiative, committing $10m to support companies working to integrate green energy technologies within bitcoin mining. Seetee, the newly-launched investment arm of Norway’s holding company, Aker ASA [FKM], will mine bitcoin using “stranded or intermittent electricity”, reports Coindesk’s Daniel Kuhn.

 

Why are firms going green?

According to Brody, there are two key reasons for companies wanting to move to cleaner forms of bitcoin mining. Firstly, they are anticipating future regulatory changes in the bitcoin sector. Brody tells Coindesk, "in practice, firms either get comfortable with the ESG hit of bitcoin and allocate, or they don't and stay away."

The second factor is that customers, along with other important stakeholders such as ESG investors, are essentially demanding that businesses adopt more eco-friendly practices to help deliver a more sustainable future.

 

Are there greener bitcoin alternatives?

While environmental concerns also surround ethereum, its blockchain draws approximately seven times less energy than bitcoin, according to Kuhn. Meanwhile, proof-of-stake cryptocurrencies, which do not incentivise energy consumption and are therefore more energy efficient than the commonly used proof-of-work model, suggest “new projects will likely shift their attention toward proof of stake because of the energy benefits”, says Benfield. Ethereum is set to adopt the proof-of-stake mechanism later this year.

One factor to take into account is that most of bitcoin’s energy use is connected to the mining of new coins and not the actual processing of transactions. Benfield suggests that, “once all the coins have been mined, energy usage is likely to come down, as the act of validating transactions uses far less energy than coin mining.”

The crypto sector will become more environmentally conscious over time, though for bitcoin, the journey could take a while longer yet. As Kuhn puts it, “until the global grid goes green we’ll have to put the idea of compliant bitcoin to bed.”