The AltFi View on crypto: Bitcoin has an ESG problem, someone needs to fix it

By AltFi on Monday 17 May 2021

Alternative LendingDigital BankingSavings and Investment

For crypto to really get going among mainstream investors and fund managers, a circle needs to be squared when it comes to its intensive use of energy.

The AltFi View on crypto: Bitcoin has an ESG problem, someone needs to fix it
Image source: AltFi

Weekly Leading Article

For anyone holding out for a fresh rally in Bitcoin before purchasing their Tesla Model 3 with the cryptocurrency, you’re too late. Elon Musk, crypto’s most powerful meme lord, and CEO of Tesla, last week scrapped the option for Bitcoin holders to pay for their car with it. It looks like he may have also sold all of Tesla's substantial holdings in Bitcoin (or maybe not).

Why? Because Bitcoin is bad for the environment, Musk says, and prompting greater demand for fossil fuels. Even when generated via renewable energy, owing to the sheer volume of electricity mining and validating transactions requires, it is not suitable at present, says the some-times world’s richest person.

Musk’s change of tack doesn’t ring true when viewed as a road to Damascus moment. As a smart, well-informed person he almost certainly knew about crypto’s energy problem. So what could be the reason?

ESG. Few outside of finance know, but it is one of the most powerful and lucrative acronyms in history. Today it's seldom off of the lips of those in financial circles for long. Environmental, Social, Governance factors are now used to screen everything from investments to loans. Falling on the wrong side of ESG has serious potential pitfalls. ESG powers investment funds and indices. Those stocks with bad ESG scores increasingly don't make it into portfolios. 

While institutional investors are indeed expanding their interest in crypto, from a very low base, the momentum is nothing like as powerful as that which powers ESG. If crypto’s reputation for lacking in this regard increases, it’s clear where investors will stay firm when caught between the two. 

Crypto enthusiasts, of which there are now tens of millions, thanks to a sustained rally in the past 18 months should face this head-on instead of trying to ignore the problem. Surely something so potentially disruptive can be further innovated to be greener?

What are the facts? The short answer is they are hard to come by. Research from Cambridge University’s Centre for Alternative Finance found “valid concerns that Bitcoin’s growing electricity consumption may pose a threat to achieving the United Nations Sustainable Development Goals in the future,” as well as estimating that energy consumption from Bitcoin is growing rapidly.

The counterargument is that Bitcoin acts as a “subsidy” to renewable energy consumption. 

Detangling all this is hard and something of a moot point. What matters is public perception. At present, people solely buy Bitcoin and other crypto assets in the belief they will go up in value. If crypto’s reputation for being bad for the environment does not cease it’s hard not to imagine how further Bitcoin crashes, and perhaps a long term decline, might occur.

The AltFi Leader is a new weekly view for 2021 from our editorial team. We’d love to hear your ideas, thoughts, feedback and constructive criticism: editorial@altfi.com

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