Green Finance Advisor of Friends of the Earth (HK)

Bitcoin’s energy use is “staggering” and becoming a worry for big investors as it conflicts with the new focus on environmental investing. In view of the above, we would like to take a high-level preliminary look on whether ESG and cryptocurrency are compatible investment strategies.

Environmental

The major environmental concerns of ESG relate to reducing the impact of climate change and ensuring sustainable development. It is a huge consumption of electricity for bitcoin mining and it is no secret that the process of validating transactions used by the leading cryptocurrencies such as Bitcoin, Ethereum and Litecoin is incredibly energy inefficient and generates vast amounts of carbon dioxide.

According to the Digiconomist website, Bitcoin mining alone generates as much CO2 as New Zealand, and uses as much electricity as Chile, even more electricity each year than Argentina and Ukraine due to the energy- intensive mining process.

According to Cambridge research, the inefficiency and waste look even worse compared to existing financial infrastructure. The CO2 produced processing one bitcoin transaction is the same as that generated processing 722,705 Visa card transactions.

Renewable Energy

The arguments used in favour of cryptocurrencies from an environmental perspective are that they mostly use renewable energy, and that their energy consumption acts as an incentive to develop more environmentally friendly forms of energy production. 

It is true that a significant proportion of Bitcoin mining is powered by renewables, according to research by the University of Cambridge, but the heavy concentration of Bitcoin mining in China demonstrates a great deal of mining is generated by burning coal and hence CO2 production. Others argue that bitcoin mining can be powered by renewable energy such as hydroelectric power or even wind power, however, the wind power will fluctuate from one minute to the next and may reduce the local bird population. In addition, there are also disadvantages of hydroelectric energy, causing environmental and social threats, such as damaged wildlife habitat, harmed water quality, obstructed fish migration, and diminished recreational benefits of rivers. In view of the above, there are major problems with reliance on renewable energy and hence it is not surprising that bitcoin miners would retreat to traditional sources of energy such as coal burning and shale oil.

In essence, investing in cryptocurrencies would impose challenges to the environment and create environmental concerns under the ESG framework.  Perhaps, more studies and research should be done in the near future as investing in cryptocurrencies has become increasingly popular in the financial world.


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