Last year, the Nikko AM Ark Positive Change Innovation Fund returned 68%, powered by a huge bet on crypto: the fund owns a large share in Coinbase, a cryptocurrency exchange platform. However, despite the potential of large returns, many asset managers are reluctant to include crypto assets in their sustainable portfolios, citing controversy over their energy intensity and propensity to facilitate illegal activity.
For Sophie Lawrence, stewardship and engagement lead at Greenbank, the main concerns relate to the environmental impact of cryptocurrencies, including bitcoin (BTC).
“Bitcoin ‘mining’ requires electricity on a vast scale to run the computers involved, and these mining operations are often based in locations where cheap and plentiful dirty electricity is generated from fossil fuels, such as China and Kazakhstan. The competitive nature of cryptocurrency mining has also pushed miners to upgrade and replace their hardware at regular intervals, leading to a significant amount of redundant electronic waste.”
The stats seem to back this up. A recent report from BestBrokers showed, following the halving of the bitcoin block reward on 19 April 2024 from 6.25 to 3.125 BTC, the electricity required to produce just one BTC doubled to a staggering 854,403.71 kilowatt hours (kWh), given the current hashrate and mining hardware specifications.
To illustrate the enormous amounts of electricity used to mine Bitcoin globally, the team at BestBrokers calculated the average yearly power consumption for bitcoin mining in each country. They also checked the cost of this power consumption at each country’s local average business electricity rate per kWh as of April/May 2024 for the 10 largest BTC mining nations.
According to the report, 450 bitcoins are mined daily, costing mining facilities 384,481,670 kWh of electrical power – 140,336 gigawatt hours (GWh) yearly, more than the annual electricity consumption of most countries, save for the 26 most power-consuming ones.
Mining facilities in the US are responsible for a major share of this global production at 37.9%, or 145.6 million kWh daily, the report continued. But, while it was economically viable to mine bitcoin in the US by using grid power entirely, post-halving this is no longer the case, leading some operations to rely mostly on their own renewable energy sources or special deals with suppliers.
Environmental and social benefits
One of the often-overlooked benefits of cryptocurrency, however, is its ability to drive social change, according to Rahul Bhusan, managing director for Europe at ARK Invest.
“If you look at the statistics around bitcoin adoption by country, Nigeria was ranked number one, with Vietnam, the Philippines, Turkey and Peru all in the top 10. And these are all emerging markets. So, it’s hard to argue with the point there aren’t social benefits to an industry that runs parallel to the traditional financial sector that exists digitally, and is accessible to everyone,” asserted Bhusan.
He also pointed out, in many of these countries, the local currency tends to be more volatile, and they are among the countries receiving the most amount of remittances. For those people sending money back home, the fees to do so through Western Union, Bhusan argued, would be astronomical. But it would be essentially free to transfer money home via a cryptocurrency.
“That’s probably the biggest thing that gets overlooked because everyone is just focused on carbon emissions. From an investor’s perspective, no one is going to invest in a crypto miner just because they’re trying to address an environmental solution. That’s only good for the company’s MSCI ESG rating. But the real impact of crypto is more in the ‘S’ in ESG, while addressing an internal pain point around ‘E’ as an added bonus.”
Nevertheless, carbon emissions are an important aspect of ESG risk analysis. To address this, as previously mentioned, crypto miners are beginning to transition to renewable energy sources, whether that be from a local power grid, or from their own solar array, for example.
Meanwhile, Cathie Wood – CEO of Ark Invest – told PA Future some facilities in Texas are taking part in grid balancing programmes, where residual or excess energy generated from renewables, which cannot otherwise be stored in batteries, is utilised to power crypto mining facilities rather than letting it dissipate.
“I’m not sure if it will be a long-term solution, and it’s localised to Texas specifically because of the rapid adoption of renewable energy there, but it shows a pathway for integrating mining within renewable energy initiatives,” Bhusan said.
“However, I think the long-term solution is for miners to realise they can be more profitable by not buying in energy and producing it for themselves through solar or wind, plus battery storage. For investors, encouraging them to reduce their bottom line this way is obviously good for profits.”
For Bhusan, the fact sustainable mining represents “over 50%” of the share of crypto mining in total is impressive for an industry less than 10 years old.
“It’s surprising in a good way, and I think the cost dynamics and the fact people don’t want to be subject to the oil and gas price fluctuations of recent years has moved the industry along very quickly.”
Challenges in measuring social impact
However, Bhusan, added measuring and comparing investments based on social impact is difficult. For Bhusan, an impact fund has to be built thematically and fund managers have to force themselves to have a narrow focus. Given this, ARK Invest Europe has not launched any crypto-focused strategies, as there is no way to perform a full assessment on a stock-by-stock level.
“Right now, it’s impossible to assess SpaceX, for example, versus a crypto miner in terms of social impact. Starlink is doing a great job at making internet accessible to remote communities, and crypto miners are helping developing countries in terms of employment and decentralising access to credit. But there are no common metrics to compare the two, unlike for environmental impact – it’s much easier to rank the five best solar energy developers in the world, because there’s a tangible, easily identifiable score attached to its impact.”
“It’s easier to do this through a thematic lens. But are we there yet on being able to build sustainable miners impact ETF? I don’t think so. There aren’t enough companies on the market, and a lot of them are private. The industry needs to mature before investors can really get to grips with their sustainability credentials, and I think we’re about five years away from that because a lot of companies aren’t reporting yet. Most of the ESG data providers are only publishing data on two of the six EU Taxonomy objectives, for example, so it’s like putting the cart before the horse trying to get these companies to provide a comprehensive sustainability report because the data just isn’t available.”
Questions also remain over the currency’s role in facilitating illegal online transactions and its use by criminals. Lawrence said that, unlike a bank account number, which connects a specific person to an account, a cryptocurrency address can be anonymous, and cited a report from Chainalysis from 2022 that showed the global illicit activity share of cryptocurrencies in 2021 hit a then all-time high of $23.2bn in transactional volume. 2023 saw an increase to $39.6bn in the value of cryptocurrency sent to illicit addresses.
Adapting to ‘a new paradigm’
However, Bhusan remained bullish that businesses “will have to either pivot their business models or do something else to adapt quickly to this new paradigm”.
“There’re incumbent interests that don’t want this shift and, the thing is, when you have a new industry come in and flourish, it typically means creative destruction on another part of the economy,” asserted Bhusan.
“That’s not to say the two systems can’t coexist: we still have horse and carriage, even though everyone uses the internal combustion engine for transport. It’ll just be a gradual transition to the new way as the norm.”
From an investment perspective, Bhusan concluded the largest companies will probably be the first to get ahead of their ESG metrics, with crypto miners probably following afterward.
“Because they’re smaller and they can switch to renewables through incentives because it is more economical, they can reduce some of their costs and they can attract more investment from capital markets because if they can expand the number of investors interested in investing in them – let’s say from 100 to 150, with 50 of those people being ESG-minded – they’ll need better credentials to access that pool of capital and grow. There are all kinds of reasons as to why this transition will happen, but it will happen over time.
“Everyone’s so keen to regulate this without even understanding all the positive things that could materialise from this industry. We’ve seen a couple of digital assets, kittens and NFTs. But that’s it so far. We’ve barely scratched the surface in terms of potential.”
