Coronavirus might be the biggest story of the decade, but climate change will be the grand narrative of the century. As energy of any kind becomes of premium value to the planet, and the world’s transport systems come onto the electric grid, how will notoriously energy-hungry processes like bitcoin fare?
In financial services, environmental, social and governance (ESG) is becoming the new buzzword among impact-minded corporations. An example of this was the latest letter from BlackRock CEO Larry Fink promising a fundamental reshaping of finance.
Bitcoin, although it’s also about fundamentally reshaping finance, has earned a bad reputation when it comes to energy use, thanks to the vast number of specially-designed computers needed to carry out its mining process.
How you choose to interpret bitcoin’s energy consumption depends on your perspective. Bitcoin supporters might point out that PlayStation, for instance, uses up about as much power as the Bitcoin network, according to research by Bitwise Asset Management. The reinvention of money, they’ll add, is a much loftier goal than playing FIFA 20.
On the other hand, the Greta Thunberg generation may question what appears to be just another financial trading instrument – but one that consumes as much electricity as Chile, a country with 18 million people.
The recent meltdown in markets caused by coronavirus raises other questions about bitcoin’s place in the world. Bitcoin, sometimes described as “digital gold,” was always seen as a safe haven for investors, un-correlated as it was with the rest of the financial system. But the coronavirus shock saw bitcoin fall even more precipitously than the stock market. Its recent ebbs and flows have mirrored that of the S&P 500.
As economist and author Frances Coppola puts it: “If bitcoin can no longer be used as digital gold, what can it be used for?”
Wall Street’s cold feet
Some would argue the gradual encroachment of institutional money into bitcoin as a high-yielding alternative asset class comes with its own cost: a newfound correlation with the rest of the financial system.
Indeed, there has been an assumption from some quarters of the crypto world that it’s only a matter of time until swathes of institutional investment will flow into bitcoin. This will follow as the network becomes more regulated, they say, and things like dedicated exchange-traded funds (ETFs) emerge.
But with a firm focus on ESG among institutional investors of any real size, that may not happen after all, at least not at anything like the scale once predicted.
“I think bitcoiners are very much hoping in the future that institutional investors will put their money in bitcoin,” said Alex de Vries, blockchain specialist at PwC. “But it's very unlikely that shareholders of those institutions will allow companies to invest in high-carbon assets.”
It’s not easy to take the temperature of large-scale buyside when it comes to crypto. When CoinDesk asked some of the largest investment firms if ESG concerns might be a factor regarding bitcoin as a hedge, most of them declined to comment.
It was sort of this niche hippie topic for bleeding-heart liberals and there were certain connotations with ESG that it was largely bullshit.
However, one of the largest retirement funds in the U.S., which asked not to be named, said simply: “Things like bitcoin don’t fit into our portfolio.”
Within the confines of crypto, the question of ESG in relation to bitcoin does occasionally come up but it's relatively rare, said Matt Hougan, global head of research at Bitwise Asset Management.
“I would say it comes up in one out of every 20 serious conversations,” he said.