Bitcoin and the Planet – Has Anything Changed?
In March, we published a blog post discussing the ESG (specifically environmental) implications of investing in bitcoin. At the time, many were asking about Tesla’s investment and embrace of the crypto asset in light of various grumblings on the potential environmental impact of the Bitcoin network. In our post, we walked through what we know about the network, mining and the missing pieces to understand bitcoin’s true impact on the environment today and in the future. We noted Tesla’s embrace of Bitcoin as a source of comfort for ESG-conscious investors.
Now that Elon Musk and Tesla have retracted (some of) their support, were we wrong?
To summarize the relevant facts for this discussion1:
- As a proof-of-work blockchain, Bitcoin consumes energy; however, energy consumption does not necessarily equal polluting emissions.
- Bitcoin mining, by its nature, is well-suited to consume renewable and sustainable energy.
- There is not an inherently linear relationship between the number of Bitcoin transactions and energy consumption. Extrapolating an “emissions per transaction” ratio can be misleading, especially in comparison to high-volume, small-value payment networks like Visa.
- For this reason and others, comparisons with existing financial networks and assets are often misleading. These comparisons may leave out the true costs of securing a financial network, for example.
- A portion of Bitcoin mining is certainly powered by the burning of coal and other polluting energy sources in China and elsewhere.
- Today, we do not know Bitcoin’s mix of energy and consequent emissions impact. Over time, we would expect this to shift toward renewables if network hashrate continues to migrate to Western countries and renewable energy becomes cheaper than “dirty” energy (through technological developments or state-imposed costs).
Has anything changed? Reports of specific examples of polluting energy sources powering mining operations, such as those in Xinjiang, can be troubling, as they can be for any industry that relies on these sources. Developments in China have been worth monitoring, as the government in Inner Mongolia banned Bitcoin mining in order to meet emissions targets—good news for those concerned about the environmental impact.2 Some prominent American firms, like Square, have continued to work on efforts to expand environmentally conscious Bitcoin mining.3 Many (admittedly pro-Bitcoin) people suggest bitcoin can incentivize further renewable energy development as a cheaper energy resource for miners. This would be a welcome development.
This all naturally leads to the question—“Is it worth it?” For many, a decentralized network for storing and transacting value has immense value, and the related asset merits inclusion in investment portfolios. Others may disagree. We hope that investors can evaluate for themselves based on an accurate set of facts—about emissions, the network, the nature of mining and comparisons. Given what we know today about the state of bitcoin and where we believe it is heading, we do not think investors are necessarily abandoning ESG principles by owning bitcoin.
1For a deeper dive on these facts, we would recommend some of Nic Carter’s writing, recently “How Much Energy Does Bitcoin Actually Consume?” (Harvard Business Review, 5/5/21).
2David Pan, “Chinese Crypto Miners Face Unstable Regulatory Environment,” Coindesk, 4/22/21.
3Bitcoin Clean Energy Investment Memorandum, 4/21.
Important Risks Related to this ArticleThere are risks associated with investing, including the possible loss of principal. Crypto assets, such as bitcoin and ether, are complex, generally exhibit extreme price volatility and unpredictability and should be viewed as highly speculative assets. Crypto assets are frequently referred to as crypto “currencies,” but they typically operate without central authority or banks, are not backed by any government or issuing entity (i.e., no right of recourse), have no government or insurance protections, are not legal tender and have limited or no usability as compared to fiat currencies. Federal, state or foreign governments may restrict the use, transfer, exchange and value of crypto assets, and regulation in the U.S. and worldwide is still developing. Crypto asset exchanges and/or settlement facilities may stop operating, permanently shut down or experience issues due to security breaches, fraud, insolvency, market manipulation, market surveillance, KYC/AML (know your customer/anti-money laundering) procedures, noncompliance with applicable rules and regulations, technical glitches, hackers, malware or other reasons, which could negatively impact the price of any cryptocurrency traded on such exchanges or reliant on a settlement facility or otherwise may prevent access or use of the crypto asset. Crypto assets can experience unique events, such as forks or airdrops, which can impact the value and functionality of the crypto asset. Crypto asset transactions are generally irreversible, which means that a crypto asset may be unrecoverable in instances where: (i) it is sent to an incorrect address, (ii) the incorrect amount is sent or (iii) transactions are made fraudulently from an account. A crypto asset may decline in popularity, acceptance or use, thereby impairing its price, and the price of a crypto asset may also be impacted by the transactions of a small number of holders of such crypto asset. Crypto assets may be difficult to value, and valuations, even for the same crypto asset, may differ significantly by pricing source or otherwise be suspect due to market fragmentation, illiquidity, volatility and the potential for manipulation. Crypto assets generally rely on blockchain technology, and blockchain technology is a relatively new and untested technology that operates as a distributed ledger. Blockchain systems could be subject to internet connectivity disruptions, consensus failures or cybersecurity attacks, and the date or time that you initiate a transaction may be different than when it is recorded on the blockchain. Access to a given blockchain requires an individualized key, which, if compromised, could result in loss due to theft, destruction or inaccessibility. In addition, different crypto assets exhibit different characteristics, use cases and risk profiles. Information provided by WisdomTree regarding digital assets, crypto assets or blockchain networks should not be considered or relied upon as investment or other advice, as a recommendation from WisdomTree, including regarding the use or suitability of any particular digital asset, crypto asset, blockchain network or strategy. WisdomTree is not acting and has not agreed to act in an investment advisory, fiduciary or quasi-fiduciary capacity to any advisor, end client or investor, and has no responsibility in connection therewith, with respect to any digital assets, crypto assets or blockchain networks.
Will Peck is Head of Strategy and Emerging Technologies at WisdomTree. In this role, Will oversees corporate development and other strategic initiatives for the firm, including the firm’s investments in emerging technologies such as digital assets. Previously, he worked in investment banking for Bank of America Merrill Lynch covering a range of financial services companies. Will serves on the Board of Directors of Securrency, Inc., a technology company focused on blockchain-based financial services infrastructure. He graduated cum laude from Harvard University.