Does Bitcoin deserve all the ESG hate?

With the rise of the retail investor along with increased institutional adoption, it seemed at one point that bitcoin was well and truly on its way to the moon, rocketing past $60,000 along the way. But now that the cryptocurrency is hovering in the neighbourhood of $30,000, that period of wide-scale market euphoria may certainly feel like ancient history.

Detractors and bears will find many reasons to stay well away from bitcoin. One criticism, given new life by Elon Musk in May, involves the steep environmental cost of mining it. Given the widely-cited statistic asserting that bitcoin’s carbon footprint is between that of Jordan and Sri Lanka, the electric vehicle tycoon’s about-face from supporting the cryptocurrency shouldn’t be so surprising.

But according to Andrew Kiguel, founder and CEO of Tokens.com, the broad market’s ESG misgivings on bitcoin are misdirected.

“I don’t think it was ever viewed that Bitcoin would consume as much power as it does today,” Kiguel told Wealth Professional. “I think that's important for people to understand.”

As Kiguel explained, the original vision when bitcoin was created in 2008 was for it to be used by people at home, often from their computers. But the invention of the ASIC chip about seven years ago unlocked unprecedented levels of computing power, turning bitcoin mining into a commercially viable proposition.

“The introduction of ASICs to bitcoin around 2013 created the need for specialized hardware that could increase mining power – and energy consumption – significantly,” Kiguel said. “This was the beginning of moving bitcoin mining from a hobbyist activity to the full-scale industrial undertaking it is today.”

As industrial-scale bitcoin mining grew, bitcoin prices rose, albeit in a ragged fashion. The surging price of the cryptocurrency over time attracted more investors, causing even more energy consumption across the Bitcoin network as tokens are mined and exchanged. With some pundits and evangelists forecasting bitcoin at $100,000 at some point, that trend may very well accelerate.

“It’s so electricity-intensive to mine and use bitcoin today, and the price of electricity in people’s homes is usually far from the cheapest rate,” he said. “This is why bitcoin miners usually go to remote places where they can access electricity at much lower costs.”

In a perfect world, those lower costs would be offered by utility firms using renewable energy sources. But given the world’s current energy mix, the cheapest electricity sources also tend to be the ones regarded as the dirtiest.

“Unfortunately, today, the technology for renewable sources isn't enough to satisfy the world's electricity needs,” Kiguel said. “There still needs to be some kind of a shift from coal to renewables. Liquefied natural gas seems to be a good interim step where it’s still a carbon fuel, but far less pollutive, much friendlier to the environment than coal.”

Amid the extreme push for sustainable investing and business approaches today, miners are criticised for focusing on their bottom line instead of their environmental impact. ESG advocates would likewise question the wisdom of using so much energy for Bitcoin considering other activities that also need power.

But those arguments, Kiguel said, are problematic considering how most open societies today work. He said that anyone who wants to start a business and make a profit, regardless of industry, has the right to get electricity at the cheapest price they can. Their options, meanwhile, are limited by the availability of companies to supply them with energy from different sources and technologies.

“Why is the onus to use renewable energy providers and sources higher for a bitcoin miner than it is for other energy consumers, like factories or data centres?” he said. “People can use electricity on Christmas lights, social media, or gaming. I can do all that, but the government isn’t going to come in and ban me from playing video games.”

The scrutiny that bitcoin companies are subject to today, Kiguel argued, amounts to a public relations problem where their negative impacts are highlighted and singled out. In response, a lot of bitcoin companies across North America and around the world are committing to find better sources of energy. Still, he said, investors would do well to be skeptical of such promises.

“A lot of companies come out with signalling statements, using hashtags for ESG or sustainability. But as investors, you want to back companies that have some written form or proof of their commitment,” Kiguel said. “You also want to ask where they’re located; some public miners are located in Quebec, which is all hydro power that’s verifiable. Others are in Alberta, where 30% to 40% of the energy on its grid is from coal.”

Some miners are tackling the problem with net-zero commitments, offsetting their footprints with carbon credits bought on the open market. But those players are overwhelmingly likely to be in the minority, he said, as that would represent another cost of mining that miners generally may not be able to afford over the long term, given bitcoin’s volatility.

Many bitcoin miners are also under pressure from governments with an ESG agenda. As one example, miners in China are looking to relocate as the country has committed to pursuing a net-zero future. This isn’t a perfect answer to sustainability concerns, Kiguel noted, as they can simply move to other regions where they can access plenty of cheap, coal-generated electricity.

“I think fundamental flaw is really with respect to how electricity is produced in general,” Kiguel said. “That’s where maybe the governments need to really crack down more on things like coal mining and coal-produced electricity that's being used not just for bitcoin mining, but maybe for all energy-dependent activities.”

Recognizing the inherent flaws of the mining process, Kiguel said the broader blockchain industry has started to turn away from the mining process. He highlighted how Ethereum, the second-largest cryptocurrency in the world, is switching to an alternative process called staking, which he said results in a smaller carbon footprint while processing a higher volume of transactions per second.

“That is the focus of my new company, Tokens.com,” he said. “We're doing the same work as a crypto miner, but without all the electricity consumption.”