Is Bitcoin an ESG investment?

Bitcoin is no longer a plaything for a small group of Silicon Valley nerds and Reddit day-traders. With a market capitalization of $611 Billion (8th July), Bitcoin has become a significant asset class that attracts a motley crew of users raging from individual crypto fans to the largest and most sophisticated investment companies, hedge funds, banks and wealth managers.

Bitcoins’ long road to respectability and mainstream acceptance has recently been galvanized by its new status as an official currency of El Salvador, support from Ricardo Salinas Pliego - Mexico's third richest man, and growing development of crypto offerings and services from mainstream financial services providers like State Street, Fidelity, JP Morgan and Goldman Sachs.

Now that professional investors are getting deeper into the crypto markets, they are asking all the difficult questions that the early adopters in the retail markets ignored. Given the growing focus on sustainability, and the commitment of many companies to invest according to ESG (Environmental, Social and Governance) principles, it’s no surprise that one of the biggest debates centers around whether Bitcoin can fit into a ESG portfolio. We take a deeper dive into some of the issues in this article.

What is ESG investing?

Before we start, let’s clarify what is meant by a ‘ESG investment’.

ESG investing is the idea that by investing in certain companies or assets, that you can make a ‘positive’ difference to the world.

By directing your money (the theory goes) towards companies that do the least environmental damage, do most to promote social ‘goods’ and have the strongest governance, you will reward the leaders, penalize (defund) the laggards and push the world towards a brighter future – hopefully also growing your money in the process.

Now, this viewpoint is contentious and not everyone agrees that there are:

a) Problems that need intervention to be solved

b) That investment in tradable assets is the best way to effect change.

Indeed, what a ‘good society’ looks like is a question that has challenged philosophers for millennia – values change over time and between cultures, and moral judgements are ultimately the choice of the individual. So, there are as many different interpretations of what ESG investing means as there are ESG investors.

It’s important to remember that the only person who gets to define what ESG means is you and ultimately the view of Bitcoin as an ESG investment will come down to your personal view on what is best for society, the environment and how you want to build wealth.

Nonetheless, within financial services, government and regulators, a consensus has developed on the issues that are defined as ESG, and these are neatly summarized by the CFA Society in the table below.

What does ESG stand for?

Source: CFA Insitute

Criticisms of Bitcoin

Many of these issues in the table above are relevant to a company, but not to a decentralized currency (for example, board compensation, waste management, employee engagement and lobbying).

Bitcoin is not owned, controlled or managed by an individual or company. Because of that Bitcoin cannot be the subject of activist campaigns, lobbying, pressure groups, protests, boycotts, lawsuits or any other tactics that are used by special-interest groups to advance their agendas or effect policy changes. Due to this lack of accountability, influencing the perception of the user / investor becomes more important when discussing ESG concerns.

For the purposes of this article, we will focus on a few of the main ESG criticisms of Bitcoin and other crypto currencies: (our highlights)

Environmental

Criticism: That the mining and transacting of crypto currencies is energy (carbon) intensive and damages the environment.

Janet Yellen, US Treasury Secretary: “I don’t think that Bitcoin—I’ve said this before—is widely used as a transaction mechanism. To the extent it’s used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions. And the amount of energy that’s consumed in processing those transactions is staggering. But it is a highly speculative asset, and I think people should beware.”

Janet Yellen, US Treasury Secretary: “I don’t think that Bitcoin—I’ve said this before—is widely used as a transaction mechanism. To the extent it’s used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions. And the amount of energy that’s consumed in processing those transactions is staggering. But it is a highly speculative asset, and I think people should beware.”

Social

Criticism: The anonymity of cryptocurrencies facilitates criminal activity and money laundering.

Christine Lagarde, President of the European Central Bank: “For those who had assumed that it might turn into a currency: terribly sorry, but this is an asset and it’s a highly speculative asset which has conducted some funny business and some interesting and totally reprehensible money-laundering activity.”

Governance

Criticism: Bitcoin is either a Ponzi scheme, a bubble or an economic weapon.

Peter Thiel, PayPal co-founder: “I do wonder whether at this point, Bitcoin should also be thought [of] in part as a Chinese financial weapon against the U.S. It threatens fiat money, but it especially threatens the U.S. dollar.”

Bitcoin Mining – An Energy Intensive Business

The energy-intensity of Bitcoin comes from the way that it is mined. Bitcoin is a digital currency based on blockchain technology. It operates on the back of what is called Proof of Work (PoW).

PoW is the process used to add a block to the blockchain. In order to do this, a miner must solve complex mathematical equations that require a huge amount of computational power and energy. The miner that is successful in solving the equation will be rewarded with Bitcoin.

The amount of power required to mine Bitcoin and support the Bitcoin network is immense, requiring 129 TWh per year (Terawatt hours = 1 trillion watts sustained for one hour). This is more than the entire power usage of Norway – a country with 4.5 million people.

Moreover, the power needed to send a single Bitcoin from one digital wallet to another is estimated to be 707.6 KWh (kilowatt hours) of electricity – equivalent to the energy used by an average US household in 24 days.

Where does the energy come from?

Until very recently, about two-thirds of Bitcoin miners were located in China which derives the majority of its energy from coal but, in June 2021, the Chinese Communist Party ordered the shutdown of almost all mining operations.

The effect of this crackdown was that miners quickly relocated to other countries with far higher proportion of sustainable energy production such as Canada, Northern Europe and USA.

We spoke with Elie Ndinga, Research Lead with Swiss Cryptocurrency issuer 21Shares who added to this point:

“The recent restrictions of mining activities in China have accelerated the paradigm shift of bitcoin mining to North America and to a lesser extent to Western Europe going forward as we predicted a year ago. For example, the American company Square has pledged to support this type of initiative starting with $10 million. In the same vein, Elon Musk and Michael Saylor of MicroStrategy, held a private meeting with miners based in North America to form a council to disclose energy usage in a standardized manner and promote the use of renewable energy in the world. As anticipated 21Shares in our 2021 predictions, we also expect more initiatives to employ Bitcoin mining using renewable energy sources.”

The Bitcoin Mining Council estimates that 56% of the Bitcoin networks power usage now comes from sustainable energy sources, but this of course means that 44%, or 51 TWh are still generated from fossil fuels.

Even in regard to fossil fuel usage, cryptocurrencies are providing some hope in reducing emissions from the oil industry.

Drilling for oil comes with an undesired by-product- dry natural gas. Up until now, it was unwanted and burned on the spot by oil companies, releasing over 400 million metric tons of carbon dioxide equivalent (CO2e) emissions each year in the process.

Some crypto miners began to set up their operations alongside traditional oil producers, drawing power from their unwanted by-product emissions. This allowed Bitcoin to be mined for lower costs and at relatively low-emission levels. It also helps nudge large international oil companies in the direction of a more sustainable future as they slowly wake up to this profitable opportunity.

The cryptocurrency industry is also taking proactive steps to reduce the carbon-intensity of mining new coins. The recently launched Crypto Climate Accord aims to decarbonize the cryptocurrency industry by 2030 and one of Europe’s largest providers of Bitcoin ETFs – ETC Group, announced in July this year that it would be the first issuer to go carbon-neutral by using carbon credits to offset the emissions associated with it’s mining and transactional activities.

Bradley Duke, founder and CEO of ETC Group spoke to Trackinsight about this initiative:

“Now I have nothing against energy consumption per se. It is indeed one of the drivers (and benefits) of modern civilisation. What I do have a problem with is generating this energy using technologies that pollute our planet when there are now so many viable alternatives. Renewable energy is everywhere. We can use waves, tides, wind, dams, volcanos, and the sun. Enough energy reaches us from the sun in one hour to power all electrical needs on earth for a full year.

Given our flagship product BTCE holds bitcoin which has a significant carbon footprint, ETC Group’s saw an opportunity to be pro-active and be the first Bitcoin ETP in Europe to announce that we would calculate the carbon footprint of BTCE and offset it – but do it properly using respected climate action bodies to calculate the carbon emissions in a way that stands up to scrutiny. Also, we reviewed many climate action projects to offset the carbon from respected and verifiable organisations. We chose projects which resonate with the issues we’re addressing including geothermal and hydroelectric power generation projects and rewilding of rainforests in Brazil.”

The Other Mined Asset

To put Bitcoin’s power usage in context we can compare it to the gold industry. Gold and Gold ETFs can typically be held in ESG portfolios despite the fact that the gold industry is estimated to use over twice the amount of energy each year as Bitcoin – 240 TWh.  

Gold mining and refining also requires huge amounts of acids and other toxic chemicals that are damaging to local ecosystems and the gold industry is often criticized for its use of child miners and role in money laundering and terrorist financing.

If gold, that has higher energy usage, higher environmental impact and higher human rights risks can be considered ESG, then why not Bitcoin?

Money Laundering & Tax Evasion

Christine Lagarde’s and Janet Yellen’s quotes (above) shows how the financial elites fear that Bitcoin, because it is secure, decentralized, unregulated and anonymous, has become a useful tool for criminals who want to hide their activity from the long arm of the law.

Bitcoin was famously used by dark-web marketplace ‘Pirate Bay’ where users could buy drugs, weapons and many other naughty things online and Bitcoin has been used subsequently in many ransomware attacks, blackmails and kidnappings.  

However, all of these types of crimes pre-date the existence of Bitcoin and there is no evidence that Bitcoin has helped increase these crimes. The fact that Bitcoin is used by some criminals does not mean it is not ESG – after all, regular old Dollars, Pounds and Gold bars are also widely used by criminals and they all feature in ESG portfolios across the world.

What Lagarde and Yellen are really saying is that Bitcoin is a problem because, unlike regular and regulated bank accounts, governments can neither monitor, access, freeze or do anything to control your Bitcoin wallet. With almost no transparency, it makes it harder to catch criminals who are, for example, laundering drug money and also hard to tax people who are transacting or speculating on Bitcoin.

Tax can be a contentious issue, and whether or not this characteristic of Bitcoin poses an ethical dilemma is down to personal opinions about the relationship between the individual and the state. Libertarians may see taxation as robbery at the end of a gun barrel and see the denial of tax revenue to the big state as a moral positive. Liberals may see paying tax as a moral imperative to finance essential services, avoidance of which harms social cohesion.

But simply by owning Bitcoin, you are not contributing to its misuse by bad players and anonymity is not always a bad thing – especially for people living under repressive or dictatorial regimes.

Privacy can be a life saver in those situations. With access to banking and cash both subject to political control, Bitcoin and other cryptos bring the right of ownership to victims of oppression. The Human Rights Foundation documented the use cases proving that Bitcoin serves as an alternative and censorship-resistant monetary system to protect human rights in countries such as Venezuela.

There’s also another side to the way that Bitcoin is transforming the financial system that has the potential to be a hugely positive step for people in the developing world who cannot access traditional banking services.

The World Bank estimates there are 1.7 Billion adults who are unbanked, meaning they have a hard time building businesses, saving money and fully engaging in society.

Bitcoin allows anyone with an internet connection and a computer or smart phone to send and receive money. Mastercard’s research shows that there are more than 600 million unbanked people that have a mobile phone. Bitcoin’s technology offers an alternative route to financial liquidity for the world’s unbanked populations and create a more open financial system.

Commenting on this topic, Laurent Kssis, Global Head of ETP at 21Shares added “Bitcoin provides an option [to the unbanked] because it provides an alternative financial asset and monetary system accessible to anyone with an Internet connection. Hence the Bitcoin network doesn’t impose any kind of discrimination.”

So, from a social and governance aspect, while Bitcoin’s decentralized and anonymous characteristics have made it a tool for some criminal activity, Bitcoin also provides a solution to many of the poorest and most vulnerable people to engage in commerce and serves as a censorship-resistant currency for those living under oppression.

Governance in Cryptocurrency ETFs

Cryptocurrencies can be bought directly from a cryptocurrency exchange and held in a digital wallet, but for many investors, this is a complex and unfamiliar process. However, investors now have the chance to buy cryptocurrencies as ETFs, trading them vis their normal brokerage account.

From the investor perspective, this means they are dealing with regulated companies, not offshore crypto exchanges, they have no wallet to lose and are covered by the investor protection legislation in their country.

As a tradable asset, listed on a regulated exchange and subject to standard trade reporting, crypto ETFs offer some comfort to people like Janet Yellen and Christine Lagarde as there is more transparency and trackability of the investors who hold cryptocurrency ETFs and capital gains can be taxed in the same way as any other asset.

For a full analysis of the differences between trading cryptocurrency directly vs. holding as an ETF, read our guide to crypto ETFs.

So, is Bitcoin ESG?

Bitcoin and cryptocurrencies are one of a number of emerging digital asset classes that are presenting new challenges and opportunities for society.

As a high-energy use asset that is driving the renewable energy revolution, a vehicle for criminals that can be used to fight oppression, a disruptive force that is being embraced by big businesses and governments, Bitcoin is a paradox that defies easy definitions.  

Morality and ethics are ultimately personal choices that we all make and must all live with. Investors are entitled to form their own opinion on both the investment merit, and the ESG characteristics of any asset, including Bitcoin according to their own values.

Is Bitcoin ESG? – it depends on what you think a better future looks like.

More ETF resources

Take a look at cryptocurrency ETFs available in your region crypto ETFs and more with our ETF screener.

Investing in cryptos can also be done through ETFs, take a look at our guide to crypto ETFs to understand the landscape and your options.