Bitcoin’s green problem could pose an existential threat

All of which raises a crucial question: Does the movement among investors toward companies that rank highly for environmental, social and governance issues pose an existential threat to bitcoin’s success?

After all, Laurence Fink, chief executive of BlackRock — the largest money manager in the world, with $US9 trillion under management — has said that all investments the company makes in the future will be evaluated, in part, on how they plan to meet the climate challenge. Perhaps more important, investors are clamouring for companies to disclose their carbon footprint, and a group called the Task Force on Climate-Related Financial Disclosures is working on creating a global standard.

If that’s the case, how will investors view the likes of PayPal, which has been a vocal proponent of climate initiatives — but last fall announced plans to allow customers to conduct transactions in bitcoin?

Or what about Square, the payments company founded by Jack Dorsey? It has become one of the most public proponents of bitcoin, both dealing with transactions and also keeping the cryptocurrency on its own balance sheet. It holds about 5 per cent of its cash reserves in bitcoin, whose price has historically been deeply volatile.

Then there is Tesla — a company whose entire premise is to help reduce climate change through lower carbon emissions — which has invested more than $US1.5 billion of its balance sheet in bitcoin. How would its bitcoin holdings affect its sustainability score?

Other companies are also considering whether to add bitcoin to their balance sheets. And financial firms like Guggenheim Partners have already invested in bitcoin while Bank of New York Mellon says it will start financing bitcoin transactions.

Even Fink’s BlackRock has started to, in the words of a senior executive, “dabble” in the cryptocurrency by potentially allowing two of its funds to invest in bitcoin futures. Rick Rieder, the firm’s chief investment officer of fixed income, cited investors’ interest in the asset and its increasing adoption by younger, tech-savvy customers.

So far, bitcoin’s carbon problem hasn’t slowed down its price, which is hovering around $US50,000 for a token, up from about $US8,000 a year ago.

Several companies are working on some counter-intuitive ideas to turn bitcoin green. On Monday, Seetee, an investment company involved in cryptocurrency, said it planned to invest in bitcoin “mining operations that transfer stranded or intermittent electricity without stable demand locally — wind, solar, hydro power — to economic assets that can be used anywhere.”

In other words, the company plans to build wind and solar in places that might not be perfectly situated for the technology and will use the extra power to mine bitcoin, making money in the process. “bitcoin is, in our eyes, a load-balancing economic battery, and batteries are essential to the energy transition required to reach the targets of the Paris agreement,” the company said in its announcement.

Loading

There are also new ways to conduct greener bitcoin transactions. For example, users could batch transactions on something called a Lightning Network, essentially a payment channel between two users that would use less power to process transactions.

PayPal, too, argues that those new protocols may change bitcoin’s carbon footprint: “Not only are we assessing the climate impact of cryptocurrency, which is concentrated on bitcoin, but also the entire industry is evolving in the assessment and measurement standards of the potential environmental impacts and more energy-efficient protocols are emerging.”

In the near term, nearly two-thirds of all bitcoin mining is taking place in China, and “mining activities can also be found in regions with coal-heavy power generation, such as in the province of Inner Mongolia,” according to a study in the scientific journal Joule, which also raises the idea of imposing a carbon tax. “Regulating this largely gambling-driven source of carbon emissions appears to be a simple means to contribute to decarbonising the economy.”

As for Fink of BlackRock, he said he was still sceptical of the entire idea of bitcoin, before he can even contemplate the climate issues. “We are watching it,” he said. “Right now I’m more focused on efficacy.”