Crypto cannot be easily painted green

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Can crypto ever be green? Until recently, this was a question that mainly concerned idealists. The kids of crypto who got into bitcoin a decade ago were so focused on fomenting an anti-establishment financial revolt that they usually weren’t too concerned about carbon emissions.

The kind of traditional investors who worry about environmental, social and governance issues today used to shy away from digital assets because of other types of filth; As a ChainAnalysis report shows, fraud and cyber theft continue to plague the ecosystem.

Not anymore. As 2022 kicks off, even heavy asset managers like Fidelity are starting to use crypto to create exchange-traded funds. And, as Goldman Sachs pointed out this week in a research note, mainstream investors are increasingly including crypto in their portfolios as a hedge against inflation, alongside gold.

Indeed, Zach Pandl, co-head of global foreign exchange, rate and EM strategy at Goldman, estimates that bitcoin already represents 20% of the investment sphere of the “store of value” (mainly comprising bitcoin and l ‘gold). He predicts that if that ratio were to reach 50 percent, the price of bitcoin would double from its current level of $ 100,000.

However, as Pandl also notes, there is one “big obstacle” – physical dirt. Specifically, the process of “mining” bitcoin (i.e. building consensus on a shared computer ledger to create a digital asset) requires mind-boggling amounts of electricity. Indeed, bitcoin mining now seems to consume more electricity each year than Finland or Belgium, according to the Cambridge Bitcoin Electricity Consumption Index. Kosovo has just banned it for this reason.

Worse yet, most mining activity has historically taken place in China, which relies heavily on coal. Hence this tricky question for traditional investors worried about inflation in 2022: Can you get into crypto without getting your hands dirty in the real world?

The short answer is “yes, but not easily”. First, the good news: in 2021, this once-lawless corner of finance began to organize itself to become greener. Most notably, a coalition of around 200 crypto entities recently teamed up with the Rocky Mountain Institute, a Colorado-based environmental lobby, to create a crypto climate deal.

Signatories to the deal have apparently agreed to reduce carbon emissions from electricity consumption to net zero by 2030, in part through carbon offsets, but also by rocking all blockchain technology. towards renewable energy sources by 2025 and using energy tracking tools such as green hashtags.

Last month, the CCA took a step forward that would have been unimaginable five years ago. He created a serious 32-page template on how to conduct the kind of credible environmental crypto audits that could reassure a traditional pension fund. Yes, really: the (green) combinations have arrived.

Meanwhile, CCA’s pious commitments are bolstered by two other industry trends. First, Beijing’s decision to crack down on the industry last year forced many miners to leave China. This makes crypto less reliant on coal-fired electricity as many new mining operations choose to embrace renewable energy sources.

Second, industry players are turning to more energy efficient technologies for reasons that go beyond simply “being green”. The key problem is that the so-called “proof-of-work” process used to build consensus in the ledger for bitcoin is too cumbersome to conduct large-scale transactions. Many of the newer digital assets – such as cardano or solana – have therefore gone through a different process, created in 2012, known as ‘proof of stake’.

Purists argue that PoS may be less secure than PoW. But it is also much less energy intensive. And some digital assets, such as chia, have reduced power consumption even further by adopting a ‘space and time proof’ algorithm. Taken together, these measures could further reduce the industry’s carbon footprint, especially as Joe Lubin, a leader at Ethereum (the second largest digital asset) has said Ethereum will move from PoW to PoS in the coming months.

Yet, as Goldman says, obstacles remain. One big problem is that bitcoin remains tied to the PoW consensus, and it makes up about half of the $ 2 billion crypto universe. Indeed, the Sustainability Fund Monitor suggests, based on 2017 data, that bitcoin now accounts for the vast majority of electricity consumption (11 times that of ethereum, for example).

A second problem is that the industry is so murky that it remains to be seen how much transparency the CCA can really create, especially among non-signatories. Or, as the Sustainable Funds Monitor observes: “At the end of the day, the lack of transparency and data makes it extremely difficult to indicate that one currency is ‘greener’ than others. Finally, basket products created by financial institutions could significantly worsen the ESG challenge by mixing assets.

Of course, a cynic (or crypto enthusiast) might scoff that this problem is no different than other asset classes; gold, say, also has a dirty carbon footprint. This is a fair point. But maybe the key message for investors is, yes, it might be a good idea to include crypto as a hedge against inflation, but, no, it doesn’t offer free lunch. Digital gold may be going mainstream, but it hasn’t been cleaned of all the dirt just yet.

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