Bitcoin: Reality Check
“An investment in KNOWLEDGE always pays the best interest.”
– Ben Franklin
Understanding cybercurrency, particularly its stability within our global financial system, remains a mystery for many investors. There is concern that a world based on the “Bitcoin standard” would be as chaotic as the one built on the gold standard (abandoned during the Great Depression). For investors concerned about environmental, social and governance (ESG) issues, there is an added layer of unease. The slow speed and high cost of transactions recently caused U.S. Treasury Secretary Janet Yellen to say, “It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.”1
While defenders claim Bitcoin has advantages over gold and fiat money, from a solely environmental standpoint, the potential advantages are hard to find. According to a University of Cambridge study, Bitcoin uses more energy than Ukraine. (Figure1) and is closing in on Sweden. While it seems counterintuitive that the fully digital currency would have such a large carbon footprint, electricity consumption alone doesn’t fully represent the impact as roughly 65% of global Bitcoin mining takes place in China.
Figure 1 University of Cambridge Bitcoin Electricity Consumption Index
Unlike those countries transitioning toward greener energy sources, more than half of China’s electricity is still derived from coal which generates significantly greater levels of carbon dioxide emissions.2
To mine Bitcoin, computers are linked to a crypto-currency network or “blockchain” which verifies transactions. The process involves solving puzzles to ensure secure sales. The blockchain ledger is distributed across thousands of computers, each with its own central processing unit, working to complete the puzzles and competing to earn rewards (small amounts of the shrinking number of new coins.)
These processes use a LOT of energy. In fact, according to a research expert at Statista, a single Bitcoin transaction consumes more the 4 times as much energy as 100,000 Visa transactions.3
In addition to environmental concerns, there are social and governance issues. According to one cryptocurrency risk assessment, criminally associated Bitcoin addresses sent more than $3.5 billion worth of bitcoin in 2020.4 Also, the recent tendency of retail traders to act on public forums (i.e. Reddit) and celebrity recommendations (who could potentially tweet about Bitcoin’s value, buy millions while simultaneously selling) opens the door to illegal market manipulation. In addition, the decentralized crypto-currency exchange is not regulated, meaning it lacks basic corporate governance systems such as independent oversight and transparency.
Meanwhile, the price of a single Bitcoin stretched above $61,000 within the last week. Some investors appear compelled simply by FOMO (fear of missing out). Daily, it seems, Bitcoin becomes more popular for retail, big banks, even digital art collectors. For ESG investors however, there is more to consider. It is in the fundamental knowledge that serving the environment, social good and high governance standards sets the stage for a sound company. It is that KNOWLEDGE which we believe can lay the foundation for solid investments, and which Ben Franklin tells us, pays the best interest.
Eric J. Zins, CFA
1 Source: CNBC, February 2021, “Yellen sounds warning about ‘extremely inefficient’ bitcoin” https://cnb.cx/3q2O40w
2 Source: US Energy Information Administration, September 2020, https://bit.ly/3bgWNbj
3 Source: Raynor de Best, March 2021 “Average energy consumption per transaction for Bitcoin and VISA” https://bit.ly/30caxNY
4 Source: CipherTrace “2020 Year End Cryptocurrency Money Laundering and Crime Report,” https://bit.ly/3sPTqhj
This commentary is for informational, educational, and research purposes only. Past performance is not necessarily indictive of future results. Investing in securities involves risk of loss which clients should be prepared to bear.