The trouble with Bitcoin

The process of creating Bitcoin uses about 0.4% of global energy consumption and as much electricity as a medium-sized country over 12 months according to research by the University of Cambridge.

The university’s Bitcoin Electricity Consumption Index ranked bitcoin’s annual electricity consumption above that of Argentina and the Netherlands according to Candriam. As a result, the asset manager assessed the environment, social and governance implications of investing in cryptocurrencies.

The Candriam report, ‘Cryptocurrencies and ESG: a contradiction in terms?’ said the price of Bitcoin increased by more than 300% last year, However, its price volatility was demonstrated when Bitcoin rose to more than $60,000 before falling to $35,516 in the 12 months to June 2021.

Lucia Meloni, Lead ESG Analyst, ESG Investments & Research and Vincent Compiègne, Deputy Global Head, ESG Investments & Research at Candriam described in the report how new coins are created through a process called mining and “proof ­of ­work”, in which powerful computers solve puzzles to validate new blockchain data blocks, Therefor energy consumption has become a key concern for ESG investors.

They wrote: “Since ‘miners’ are rewarded with some Bitcoin when solving the complex algorithm, the higher the Bitcoin price, the higher incentive to run the calculations, which consumes more energy.”

Another ESG hurdle is that three quarters of global Bitcoin mining is in China where electricity is produced from burning thermal coal. In addition to energy consumption, other ESG hurdles are that cryptocurrencies are unregulated and can be used by criminals for money laundering or tax evasion.

Candriam concluded that cryptocurrencies have a long way to go to satisfy ESG criteria. The report said: “Until there is a serious move to resolve the concerns stated in our paper, a significant direct investment in crypto can cause severe damage to ESG credentials of an asset manager or large institutional investor.”

©Markets Media Europe 2021

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