The recent regulatory and environmental concerns surrounding Bitcoin could pave a rocky road ahead for the future of digital currencies. Can this asset class fit into the increasing demand for sustainable investing?
A feature article by Wealth Manager & Network Recruitment Consultant, Johanna O’Brien
As financial advisors, it’s important that we keep abreast of the latest investment trends. Two asset classes that seem to be constantly changing are crypto and ESG (environment, social, governance) investments.
ESG now account for more than a third of global assets. In 2020, 85% of investors have considered sustainable factors in their portfolios. (Sustainability is defined as the actions through which mankind avoids depletion of the earth’s natural resources to keep an ecological balance that doesn’t allow society’s quality of life to decline). Crypto investments are also on the rise. 1 in 10 US investors have invested in crypto, despite the potential threat it poses to the environment. Bitcoin’s current carbon footprint is equivalent to that of the energy consumption of a small country.
The future of crypto is continuing to look shaky. The 23rd of November saw panic selling among local Indian crypto investors. India’s government announced that it is considering a bill that seeks to “prohibit all private cryptocurrencies” in the country to smooth the way for a single official digital currency to be issued by the government.
On September 24th, China announced a roll-out of powerful regulations that intensified a crackdown on cryptocurrencies. This included a ban on all mining and crypto transactions, which will affect Bitcoin and other crypto and blockchain-related stocks.
These potential problems with digital currencies beg the question: what does the future hold for crypto, and can it fit into the increasing demand for sustainable investing?
ESG and cryptocurrencies
The pressure on organisations to meet ESG criteria is more widespread than many realise. The entirety of the EU is aiming to become carbon-neutral by 2050. Germany announced its plan to become a global sustainable finance state this year. Global ESG assets are on course to exceed $53 trillion by 2025, representing over a third of the $140.5 trillion in projected total assets under management in the US. Evidently, sustainability and environmental issues are at the forefront of many people’s minds.
Over increasing concerns of the environmental impact of Bitcoin, Tesla announced this year that it would no longer accept Bitcoin payments. Recent figures from Bitcoinenergyconsumption.com show estimated emissions of over 57 million tonnes of CO2 per annum. This is about the same yearly carbon footprint as that of Norway. China recently banned Bitcoin mining because miners were primarily responsible for the restoration of coal mines. Similar examples can be seen in the U.S. A gas plant in New York has been revived due to Bitcoin mining.
The problem for older cryptocurrencies like Bitcoin is miners don’t have the luxury to consider the environment because this is an extremely competitive market. Solar power is not a viable option for older cryptocurrencies. It is a less stable power source compared to fossil fuels because the machines can only run for half a day. Additionally, green energy will go to waste if it’s not used when generated. Batteries that can store renewable power for when the wind isn’t blowing and the sun isn’t shining are largely in demand from the energy industry. Unfortunately for now, these don’t exist at the required scale.
Seemingly, there is no limit on the amount of computing power people are willing to use to mine Bitcoin. Therefore, the more Bitcoin’s value grows, the more incentive miners have to use more energy trying to mine it. It is for this reason that newer crypto currencies have developed more environmentally friendly ways to process their transactions. One popular method is the Proof of Stake concept. This limits the amount of computing power that can be used. Only people who own a stake can participate.
Climate conscious crypto
A more recently established environmentally friendly crypto is SolarCoin. SolarCoin is a global, decentralised coin totally independent of any government. The coin uses the unique characteristics of blockchain technology, and you can trade it just like other cryptocurrencies. The main difference is that the platform aims to encourage real environmental activity by producing verified solar energy. SolarCoin’s novel approach to cryptocurrency is to produce 1 Solarcoin for every Megawatt hour that is generated from solar technology. Presently, this network relies mostly on users uploading documentation to show proof of energy generation. However, this process should one day be streamlined with automatic updates from solar arrays. Another feature of Solarcoin is that it can be exchanged through online trading platforms such as Bittrex and Lykke for other digital assets (such as Bitcoin) and government centralised currencies like EUR and USD.
Another eco-friendly crypto that has recently emerged is Cardano, a close rival to Bitcoin. It is essentially far more energy efficient than Bitcoin. Like Solarcoin, it uses the Proof of Stake protocols where those participating in the currency purchase tokens to join the network. This helps save an astounding amount of energy in comparison to coins like Bitcoin. Charles Hoskinson, founder of Cardano and co-founder of Ethereum, claims that the cryptocurrency network uses only 6 GWh of power annually. This number is not even 0.01% of the 115.85-terawatt hours of Bitcoin’s estimated yearly usage. Cardano has some similarities to Ethereum, but without much of the associated hype the latter token has garnered.
The Ouroboros blockchain of Cardano allows the network to impressively scale up sustainability to meet increased global demands for the cryptocurrency without compromising on efficiency, speed, or security. This is all delivered using just about the same amount of energy as 600 USA homes a year. It functions primarily as a digital currency, but can also be used for digital contracts and decentralised applications (dapps). Additionally, Cardano can achieve 1000 transactions per second, while Bitcoin is only capable of 7.
Cardano’s price surged on August 25th after news broke that Japan had authorised the coin to be listed on the country’s exchange. Japan is considered to have one of the strictest criteria for entering the market. This means Cardano’s native token, ada, will join the elite coins of Bitcoin, Ethereum, and Litecoin in Japan.
The idea of regulation has become somewhat of an unwanted probability within cryptocurrency circles. As a result, crypto prices could freefall just on rumours of large-scale regulatory moves. The philosophy of decentralisation and cutting the middleman—such as governments and banks—out of financial transactions is at the core of crypto culture, as it will permit individuals to manage their money without anyone watching.
On the other side of crypto regulation, there are hidden risks that many investors don’t contemplate. For example, if your savings are put into an interest-earning crypto platform, how certain are you that your cash is protected? What happens if the platform goes bankrupt? These are things regulation could address. Regulation means protection for retail investors against these types of issues. It also makes it easier for institutional investors to protect against worries of anti-money laundering risks, as they must follow strict compliance rules. With additional regulatory protection, more novice investors may be encouraged to dip their toes into the crypto waters and help the industry grow further.
Cryptocurrency and the future
The future for newer cryptocurrencies like Cardano looks promising. Due to the environmental threat that mining older digital currencies poses and the fact that mining and trading have been banned by two big emerging market leaders, it seems unclear how viable it is for Bitcoin to retain its position as the digital currency leader. This is in addition to the advantages and disadvantages of the possible regulation of crypto in different countries, which would almost undoubtedly hit prices in the short term. Of course, this is partially because so many are unsure of it.
As I write this, Cardano’s price has plummeted as the trading platform eToro announced it will delist the coin by the end of the year due to regulatory concerns. Cardano’s founder announced a partnership with Coinfirm, a blockchain analytics provider, to comply with regulatory frameworks, such as anti-money laundering directives. This is further proof that Cardano is aiming to become the backbone of the future financial system. The move has been unpopular among those who wanted this digital currency to take on a more decentralised stance.
Cryptoassets are unregulated in some EU countries and the UK. No consumer protection. Your capital is at risk. Crypto assets are highly speculative.
Contact us today if you are interested in discussing ESG investments with a qualified adviser.