Tuesday 6 April 2021 11:26 am CFA Institute Talk

Will ESG turn Bitcoin into a digital ‘stranded asset’ or monetary MySpace? (Part I)

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These are articles written by professionals for investment professionals. They are contributions from external subject matter experts who do not work for CFA Institute, but may be a CFA charterholder as well as a member of a CFA Society. All are experts in their field and strive to deliver useful insights that help investment professionals make better decisions.

In this first instalment of a two-part piece, Ben Ashby, Derek Usher and Gerard Fox explain why environmental, social and governance (ESG) factors will undermine Bitcoin’s eye-catching rise, here focusing on the ‘E’.

We have many economic reasons for believing that ‘first-generation’ crypto assets will fail to displace either ‘conventional’ money or traditional safe assets in the long run. But it is in the area of environmental, social, and governance (ESG) where we believe that the case against these products and their related infrastructure is most compelling.

In short, efforts to bring into the mainstream or ‘regularise’ first-generation crypto currencies in their current form, as investor safe assets, sharply conflicts with policy initiative to address the energy transition. Indeed, there is a not-immaterial risk that they may become digital ‘stranded assets’ as environmentally conscious societies seek to either ban, regulate or simply tax them out of existence.

Four themes shaping our crypto thinking

We have identified four themes that steer our line of thinking. First, we believe it is highly unlikely that any cryptocurrency would be allowed to become a true parallel currency in any advanced country and thereby threaten the state’s monopoly over money.

Second, we see the energy intensity of crypto currency mining as a substantial ESG red flag that conflicts directly with climate policy and commitments signed up by most advanced countries.

Third, increasingly there are less energy-intensive digital currency substitutes beginning to emerge, such as EOS.

Finally, we are unconvinced that the use of Bitcoin for illicit purposes can be easily solved through regulation.

How Bitcoin has led the crypto boom

Crypto currencies have grown exponentially since Bitcoin’s launch in 2008. Its market capitalisation alone passed the $10bn mark in Q4 2016, growing to over $1trillion in February 2021. Such exponential growth saw the value of an individual bitcoin rise from $600 in Q4 2016 to $39,000 in early February 2021, peaking at over $61,000 on 14 March; a growth in value of 100 times.

This growth has increased the profit motive to compete for Bitcoin transactions and mine new coins and has been accompanied by calls for cryptos to be included in mainstream asset allocation and considered a standard part of investors’ portfolios and cash management.

Tesla’s recent controversial decision to buy $1.5bn of Bitcoin to put on its balance sheet has added fuel to the fire. In addition to the highly questionable value of Bitcoin as a store of working capital, the fact that Tesla is a company that burnishes its ESG credentials, renders the decision somewhat bizarre.

Bitcoin and the ‘E’ of ESG

The energy intensity of Bitcoin-related activities is not disputed by its advocates, but the magnitude and nature of energy use is poorly understood by the investor community. Bitcoin’s green credentials are highly questionable and ultimately un-auditable compared to other safe assets or mediums of exchange.

A recent study by Cambridge University Judge Business School estimated that Bitcoin-related activity uses anything between 38 TWh and 259 TWh of electricity annually, depending upon the estimation methodology used, with a mid-case of 109 TWh. To put this in context, this compares with UK annual electricity consumption of about 300 TWh. If we take the mid-range estimate, Bitcoin mining equates to that of the 15th-largest country in the world in terms of electricity use.

This huge energy-use intensity currently supports annual global Bitcoin transactions, whose volume is 190 times less than UK Non-Mainstream Financial Institutions (MFIs) transactions (which include debit card and credit cards, direct debits and cheques).

Whichever of the energy-use estimates is accurate, it is surely questionable for a global activity that arguably produces no tangible value and is dwarfed by financial transactions in the UK alone to be allowed to continue to operate in an environmentally conscious society.

Chasing cheaper electricity?

It has been argued by some that since Bitcoin mining is so energy intensive it is forced to chase cheap electricity, utilising variable renewable energy (VRE) or low-carbon ‘stranded’ electricity sources, incentivising it to locate itself in renewables generating intensive regions or countries like Iceland. Estimates of this renewable electricity component range from 30% to 70%.

However, claims towards the upper end of this range just do not stand up to scrutiny. First, Bitcoin mining does not largely occur in countries with a high proportion of renewable energy generation.

Second, despite 36.7% of global electricity coming from low-carbon sources, only around 10% comes from VRE, suggesting a limit to the capacity of miners to access cheap VRE sources and high odds that more emissions intensive electricity dominate.

Third, the mission to electrify most things over the next 30 years (and to bring nearly a billion people currently off the grid on to it) will require a massive increase in global electricity generation capacity – a doubling in the UK alone. There are clearly more important demands on the generation system than Bitcoin mining.

Finally, even where utilising renewable electricity, through demand displacement the energy requirements of Bitcoin have the potential to adversely impact on the quantity of ‘dirty’ energy produced globally, as less profitable activities have to use alternative sources. Thereby slowing the pace of CO2 emissions reduction.

Bitcoin has a lot to prove

Taking these arguments in the round, claims around any alleged greenness of Bitcoin mining will likely have overrepresented the importance of renewable energy sources in its creation.

Regardless, the burden of evidence falls on Bitcoin miners to demonstrate their green credentials. It is our belief that in its current architecture it is not possible to reliably audit Bitcoin from a carbon footprint perspective.

Especially with the new technologies that have been developed such as PoS (Proof of Stake) and DPoS (Distributed Proof of Stake), which move away from the high computational effort approach of the early blockchain products. For instance, EOS which is based on DPoS technology claims to be 66,454 times more energy efficient than Bitcoin.

Given its limited use as ‘money’, if Bitcoin and its peers should be compared to anything at all, then possibly gaming software is more appropriate.

To be clear, this is not to say there isn’t a niche opportunity for some future money architecture or an opportunity for future crypto ‘assets’ as opposed to a ‘currency’ as an alternative investment vehicle, but we are deeply sceptical that first generation of crypto is the finished article. Rather it has a high probability of becoming a monetary MySpace or Betamax as the technology improves and regulations change.


See part II of this article, which will be posted next week, for Ben, Derek and Gerard’s thoughts on ESG’s ‘S’ and ‘G’.


Originally published at the CFA Society United Kingdom Professional Investor blog.


By Ben Ashby, CFA Partner at Good Governance Capital. Previously Ben was a Managing Director in JPMorgan’s Chief Investment Office & Treasury.

Derek Usher, Consultant at Good Governance Capital. Previously Derek was Manging Director of Cabot Credit Management. 

Gerard Fox, Consultant at Good Governance Capital. He is a Director of the Regulatory Policy Institute. A member of the Corporate Programme Advisory Group for the Institutional Investors Group on Climate Change (IIGCC).

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.


Image credit: ©Getty Images / robertsrob

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