Few investment trends have captured the wider imagination in the same way that bitcoin has. Likewise, few investment rules have overtaken institutional investment strategy as quickly as ESG – or environmental, social and governance directives – have.
Unfortunately for bitcoin fans, these two trends appear at loggerheads.
Detail the damage
The environmental damage from bitcoin and its mining is by no means a new discovery. Quantifying the damage, however, is difficult. After all, terawatt hours are not a common unit of measurement for most people.
For a simpler benchmark, the University of Cambridge Bitcoin Electricity Consumption Index estimates that the bitcoin industry uses about the same amount of electricity as all refrigerators in the United States. This envisions a reduction in mining activity both due to price drops and closures in Bitcoin’s most popular mining destinations like China.
Yet the energy consumption spent on bitcoin mining is only expected to increase by the very design of the cryptocurrency. As only 21 million coins are supposed to be available, the system is gradually increasing the computing power required to mine a single coin as the supply tightens so as not to make all coins immediately available.
In terms of actual use cases, bitcoin’s status as a pure investment does little to allay concerns about wasted energy. Meanwhile, the idea of ââusing bitcoin as currency is also distressing for environmentalists. According to a Statista estimate released earlier this week, a bitcoin transaction uses more than 10 times more energy than 100,000 passes from a Visa (V) card.
“Back when bitcoin was structured, it didn’t consume a lot of power, the number of users was small, and climate change was not yet a daily problem,” said Sudhir Roc-Sennett, head of the thought leadership and ESG at Vontobel Asset Management, said Real money. “So this is a new and big problem for bitcoin. There is just no way around the fact that it is a carbon expensive thing to do.”
In this sense, the âEâ and âSâ of ESG seem difficult to marry with the secular change professed by so many bitcoin evangelists.
Opportunity cost assessment
Yet Roc-Sennett quickly noted that out-of-context assessments of environmental impacts are misleading at best. Ultimately, he said, we need to take stock of the opportunity costs associated with the environmental impact of bitcoin.
“It’s really a question of whether the energy is excess or not,” he explained. âIf there really is no opportunity cost in using energy for bitcoin mining, miners can generate income and then pay income taxesâ¦ that would be a real benefit. . “
Roc-Sennett added, however, that the energy used should be renewable in itself. The negative indirect costs generated by using 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 used and, as long as they do not occur in a “tragedy of the commons” scenario and are not inherently damaging to the environment, bitcoin is not a burden on the environment. economy nor for society.
Moreover, some argue that even the use of certain fossil fuels is worth it, as they emit endless carbon dioxide in the current system. Blaine Townsend, senior vice president and director of sustainable, responsible and impact investing at Bailard, cited as a key example the practice of burning excess natural gas emitted as a byproduct of oil exploration, known as flaring.
âNot only is bitcoin moving towards owners of energy assets, it could also help reduce gas flaring,â he said. Real money. âThe International Energy Agency has calculated that in 2018, this gas flaring released approximately 275 million metric tonnes of CO2 emissions. This is more than the carbon emissions of the entire Argentina.”
By harnessing this surplus gas for bitcoin, Townsend believes that CO2 and other harmful emissions of volatile organic compounds can be significantly reduced, while doing something with the energy rather than burning it in 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 makes it vulnerable to confusion over use cases.
“Technology has a purpose, it hasn’t found its place in the world yet. People can always say, ‘What is bitcoin really good for? “”, did he declare. Real money. “Three percent of the world’s energy is used 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 goals its supporters have long pursued of disrupting the current financial system which itself is not overly environmentally friendly, those scruples will be significantly calmer. The question that remains is how quickly he can overcome current questions about his real purpose.
Finding a solution
However, the end of the game of shifting the conversation to bitcoin and therefore the crypto space more broadly in terms of environmental impact might require an even more fundamental change. In fact, the issue of environmental impact may actually take Bitcoin away from the very protocol that made it so popular in the first place.
David Blatt, CEO of financial advisory firm CapStack, said Real money that a major paradigm shift is already underway in the wake of increased ESG importance.
“Many cryptocurrencies are now moving from Proof of Work (PoW) which requires power to mine, to Proof of Stake which does not,” he noted. “So we’re going to start to see this become the norm as ESG is very much on the mind, especially for institutional investors who are starting to embrace crypto.”
The protocols cited by Blatt deserve to be developed. Right now, Bitcoin is leveraging its distributed ledger technology via PoW, which uses mathematical and crypto puzzles to ensure peer-to-peer transactions can be done without an arbiter. In addition, it protects against sybil and denial of service attacks.
However, this system comes with an inherent flaw that was not foreseen by its institution.
âAs the monetary value and / or utility of a PoW network increases, the consensus mechanism can be problematic from a sustainability perspective,â said one. recent paper of the UCL Center for Blockchain Technologies explains. âIndeed, as the network becomes more popular and attracts more activity, the level of difficulty of the crypto puzzle increases, resulting in higher power consumption of the network. ”
As a result, many crypto enthusiasts are looking for alternative authentication systems that might ultimately lead ESG and crypto investors to find a pleasing 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 running simultaneously to the finish line to complete a puzzle, the proof-of-stake model assigns a validator to the calculation that is rewarded with ether upon success,” Townsend explained. by Bailard. “With this recently adopted proof-of-stake framework, researchers believe that energy use could drop massively to 1 / 10,000 of what is needed now.”
The recent UCL study confirmed this optimistic outlook in its research model, while delivering a critical message to the entire crypto industry.
“Apply this model to six different points of sale [distributed ledger technology] DLT systems support the hypothesis and show that their energy consumption per transaction is indeed at least three orders of magnitude lower than that of Bitcoin, “the study concludes.” These results can be understood as an urgent call. modernization of PoW systems and a switch to PoS, as well as a recommendation for practitioners to consider suitable and energy efficient equipment. “
In a still fledgling industry, of sorts, claiming to essentially change the whole world, one might have expected that the industry itself was likely to undergo some of its own changes.
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