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Bitcoin in an ESG world


As demand for services and insights into sustainable investing is surging, many number of investors and funds are looking to invest explicitly based on environmental, social and governance (ESG) criteria. The question if Bitcoin is “ESG-friendly” could be the final hurdle stopping other institutional investors from hopping on into the crypto space given the already rising trend in institutional adoption, a trend started by MicroStrategy back in August 2020.


According to Digiconomist, the annualized carbon footprint of Bitcoin is currently around 38.67 Mt CO2 which is comparable to the carbon footprint of the country of Ireland and New Zealand.

Total CO2 emissions by country

Source: Edgar


Although the most recent data is only up till 2019 which was released in a 2020 report, the fact is that there has been a trend of global CO2 emissions decreasing since the 2000s for example a 13.69% and 19.83% decrease in emissions for the US and EU respectively. While on the other hand, the global CO2 emission for Bitcoin is increasing as its price continues to rise.

Source: CBECI, BECI


Investors have been raising concerns regarding Bitcoin’s carbon footprint as its energy consumption coupled with its transaction speed gives a high electricity cost per transaction. For context, Bitcoin currently generates a new block limited to 1MB only once every 10 minutes and handles about 7 transactions per second. In comparison, VISA processes 24,000 transactions per second.

However, this is a misconception as solutions to Bitcoin’s scalability can be tackled with the use of second-layer solutions which maintains the structure of the original protocol while focusing on off-chain methods to boost scalability. Energy consumption for Bitcoin is spent per block and not per transaction and a block can have different number of transactions. Hence, with the use of second-layer solutions such as Batching, Lightning, Segwit, etc., the economic density of Bitcoin’s transaction will always be increasing with improved efficiency which will tackle its scalability issues.











Given that Bitcoin is deflationary, with a limited supply and already 88.83% has been mined, miners’ revenue will be on the decline due to halving and lesser supply of Bitcoins as well as the carbon footprint from the issuance of coins.

These miners will have to find some other way to retain their revenues be it by increasing fees or by cutting cost by finding the cheapest method to generate the highest hashes which is currently renewable energy like solar and hydroelectric energy. A study by the University of Cambridge during the 3rd Global Cryptoasset Benchmarking Study shows that 76% of cryptocurrency miners use electricity from renewable energy sources as part of their energy mix. And given the power sources of hashing facilities, there is still room for improvement on that front.


Source: University of Cambridge, Judge Business School


But before we get down into the issue of the problem itself, we should first understand the big picture of energy consumption itself before moving on.

We will be working with data provided by the Lawrence Livermore National Laboratory (LLNL) on the estimated US energy consumption in 2019.


Source: Lawrence Livermore National Laboratory (LLNL)


The US and also the rest of the world is wasting more energy than it uses every year because excess capacity must be generated to meet demands that are constantly fluctuating this has been a constant problem for efficient grid management.

Currently, rejected energy accounts for 67.5 quads which is more than what is currently used. However, the number we should be looking at is the 24.2 quad which is the wastage generated from electric generation. As Bitcoin might have a way to tackle this problem.


Now how does Bitcoin help tackle this issue?

Sustainability is not maximized by reducing energy consumption but rather by increasing electricity production while minimizing pollution. This is why there has been a decoupling in the relationship between economic activity and electricity use as it is primarily driven by renewable energy.

Source: McKinsey Energy Insights’ Global Perspective, January 2019


Nonetheless, the underlying fact is that global energy demand has been on the rise and that the problem lies in minimizing this pollution that comes with it. Bitcoin is able to tackle this issue by working with grid operators who constantly monitor and manage the demand and supply to ensure that people have access to power.

With the use of Application-specific integrated circuit (ASIC) chips, mining can be turned into to something that encourages the growth and development of renewable energy. ASIC chips can help to reduce Variable Renewable Energy (VRE) curtailment by tapping on this excess energy source so that they don’t get released into the environment. Reducing emissions as a whole.

A collusion between miners and grid operators with their load balancing would reduce emissions into our environment allowing for more efficient grid management while at the same time providing a cheaper source of energy for miners, hence increased revenues.




Given the current economic landscape where each economy’s growth in the recent years has been stimulated by gains in energy efficiency, coupled with the rising trend of ESG. Sustainable investing is something that investors can no longer afford to ignore but many investors are questioning if Bitcoin has a place in this ESG centric environment. No doubt Bitcoin mining requires lots of energy to sustain but given its deflationary nature, miners will want to seek more cost-efficient methods to mine in order to retain revenues. One such example is a collaboration between miners and grid operators which can help reduce emissions led by excess energy production while providing miners with a cheap source of energy.



References:

Bitcoin Energy Consumption by Digiconomist https://digiconomist.net/bitcoin-energy-consumption/

Total CO2 emissions by country by Edgar https://edgar.jrc.ec.europa.eu/overview.php?v=booklet2020

Bitcoin Halving Statistics by bitcoinblockhalf https://www.bitcoinblockhalf.com/

University of Cambridge 3rd Global Cryptoasset Benchmarking Study https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/3rd-global-cryptoasset-benchmarking-study/

Energy Flowcharts by Lawrence Livermore National Laboratory https://flowcharts.llnl.gov/commodities/energy

Growth in economic activity and electricity use is changing around the world by EIA https://www.eia.gov/todayinenergy/detail.php?id=33812

Decoupling of gas and energy by McKinsey https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/the-decoupling-of-gdp-and-energy-growth-a-ceo-guide

Energy efficiency can boost economies quickly with long lasting benefits by IEA https://www.iea.org/commentaries/energy-efficiency-can-boost-economies-quickly-with-long-lasting-benefits








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