How Bitcoin Fares as an ESG Asset

Environment, social, and governance criteria are benchmarks that many companies and corporations strive to meet in order to better contribute to society and ensure that their operations constitute a net force for good.

Many investment funds will categorize speculative assets such as shares, goods, and cryptocurrencies based on their ESG merits, with assets that adhere to high ESG standards commonly seen as a better long-term investment, due to the gradual shift in attitude toward environmental friendliness, fairness, and social freedoms.

The ESG criteria are divided into three categories:

  • Environmental — how does the asset impact the environment? E.g. pollution, energy usage, greenhouse gas emissions, damage to wildlife, and consumption of limited resources
  • Social — how does the asset affect living conditions and personal freedoms? E.g. charity efforts, lobbying, human rights, working conditions, and equality
  • Governance — is the asset fairly governed? E.g. is it democratic in its revenue sharing, transparent in its accounting, or operating using dubious business practices or unethically

Cryptocurrencies like Bitcoin are commonly measured against various ESG criteria by those that wish to invest responsibly. Here, we take a look at how it performs.

Cryptocurrencies and Governance

Cryptocurrencies represent a paradigm shift in the way that value is distributed and controlled. Unlike traditional currencies, which have their money supply controlled by the government and central bank, cryptocurrencies have their money supply grow at a known rate which is fixed in its programming.

In the case of Bitcoin, its inflation rate halves roughly every four years, which means that the rate of new Bitcoin entering circulation gradually decreases with time, until a fixed maximum of 21 million units is in circulation. This number cannot be changed without dramatically overhauling the Bitcoin network, which would require the support of more than half of the Bitcoin network.

But more than this, many fiat currencies are heavily criticized for their reliance on the powers that be, with opponents arguing that lawmakers typically enact monetary policies that benefit the few rather than the many. Conversely, Bitcoin is a tool designed to benefit the masses, by taking the power from centralized parties and distributing it among all stakeholders.

These features have helped earn Bitcoin a reputation as a vehicle for social change and a more efficient way to distribute wealth and enforce democratic decision-making. Since the platform is completely transparent in its operation, all stakeholders and external observers can easily check the public Bitcoin blockchain to see exactly how BTC is being minted and moved around.

Conversely, most governments are rather opaque in their spending and operation, particularly in countries that are low on the democratic index. Bitcoin solves this, by making everything open and accounted for.

Bitcoin’s Positive ESG Factors

As a completely decentralized blockchain network and cryptocurrency platform, Bitcoin does away with intermediaries and facilitates a truly peer-to-peer economy where monetary policy is set in stone and cannot be changed on a whim by some ruling entity.

This provides it with a number of economic benefits over traditional monetary systems, including providing a fixed rate of inflation, a maximum money supply, and borderless transactions. This ensures that Bitcoin doesn’t only maintain its value over the long-term, but actually sees its purchasing power increase while ensuring cross-border transactions can be conducted extremely quickly and at a low cost.

Indeed, according to data from World Bank Group, the average worldwide remittance cost currently stands at 6.38% of the amount sent (i.e. $63.80 for every $1,000 sent). For comparison, the average Bitcoin transaction fee sits at under $3, irrespective of the amount sent. This is being further reduced by second-layer technologies like the lightning network, which allows Bitcoin to be used for micro-transactions with essentially negligible transaction fees.

Image courtesy: YCHARTS

Its resistance to purchasing power collapse has seen it achieve rampant adoption in countries suffering from hyperinflation, including El Salvador — which recently declared Bitcoin as legal tender. This is also helping those in less economically developed countries better their perspective and operate on a more even playing field with the rest of the world since they can now leverage a fiat alternative that is open, transparent, and free from monetary controls.

It also ensures individuals have full sovereignty over their funds and cannot be subject to a bank bail-in, freeze, or unwarranted seizure, since each user’s private key acts as a personal vault for their funds.

As a result, Bitcoin has the potential to elevate countries, businesses, and individuals suffering due to economic decline, simultaneously boosting the quality of life of individuals suffering due to monetary controls, runaway inflation, or supply shocks. This also helps integrate these businesses and individuals with the global economy, since Bitcoin essentially eliminates artificial trade borders and restrictions.

Bitcoin’s Perceived Negative Factors

In its current iteration, there is no getting around the fact that Bitcoin uses a huge amount of electricity. This is required to maintain the rapidly growing Bitcoin mining network, which protects the blockchain from majority attacks, like roll-backs and double-spends.

Oftentimes, Bitcoin is criticized for its heavy energy usage, since it uses roughly the same amount of electricity as a small country. However, energy usage, in and of itself is not malicious — it’s the source of the energy used that really counts.

Fossil fuel derives energy sources are known to contribute to global warming by causing greenhouse gas emissions. But the Bitcoin mining network is actually one of the biggest consumers of green energy — largely relying on wind, solar, and geothermal energy to keep the network running.

Indeed, according to recent statistics by the Bitcoin Mining Council (as reported by Cointelegraph), the Bitcoin network currently sources more than half of its energy needs from renewable sources. To put this into perspective, if the Bitcoin network was a country, it would share joint first place with Norway for the proportion of its energy it derives from renewable sources, at 56%.

Beyond this, Bitcoin is frequently blasted over how just a handful of wallets hold a large chunk of its circulating supply, with many detractors saying that the Bitcoin supply is largely concentrated. However, according to a recent study by Glassnodes, the absolute largest Bitcoin holders (i.e. those with over 500 BTC) currently hold around 38.3% of the supply, whereas the smaller entities (those with under 500 BTC) hold around 39.7% of the supply.

Image courtesy: Glassnodes

On the other hand, the top 1% wealthiest households hold more than 50% of the world’s wealth. Comparatively, Bitcoin is far better distributed among holders than most fiat currencies, and the number of smaller holders is growing faster than larger ones.

This distribution of wealth is incredibly important from a governance perspective since it ensures that Bitcoin doesn’t develop into an aristocracy or corporatocracy.

Can Crypto be Sustainable?

Right now, the two most popular cryptocurrencies — Bitcoin and Ethereum — use a proof-of-work consensus system. This means they use large networks of miners to enforce their security by making it almost mathematically impossible to subvert the network without already controlling more than half of it.

However, in recent months there have been great strides in boosting the efficiency of these networks, this includes the recent Bitcoin Taproot upgrade, which boosts the efficiency of transactions, as well as a broad-scale transition to cleaner energy sources.

With recent advances being made with alternative consensus systems, including Proof-of-Stake (PoS) and Delegated-Proof-of-Stake (DPoS), there are now a variety of ways to keep a blockchain secure without requiring specialized mining hardware. Ethereum is eventually set to migrate to PoS when the Ethereum mainnet merges with its secondary Beacon chain in 2022 — bringing with it a hybrid consensus model that dramatically improves the efficiency of the network.

But as of yet, there are no major proposals nudging Bitcoin to do the same. Nonetheless, according to the founder of the cryptocurrency broker Bitcoin Suisse, Bitcoin will eventually make the transition also.

“Ether will move to a Proof-of-Stake concept that demands vastly less electricity […]. I’m sure, once the technology is proven, that Bitcoin will adapt to it as well,” said Bitcoin Suisse founder Niklas Nikolajsen.

Moreover, an ESG-friendly Bitcoin ETF was launched by Ninepoint back in April 2021, allowing investors to gain exposure to carbon-neutral BTC, since the fund manager sets aside some of its management fees to offset the CO2 burden of the BTC held in its fund. Similar efforts are being seen across the sector, with cryptocurrency miners increasing opting to use renewable sources of energy or using a fraction of their yields to offset their CO2 impact, such as through the purchase of carbon credits.

Bitcoin’s ESG Future

Bitcoin has long been hailed as a disruptive technology that is set to shake up the way people think about money, value, and governance. However, while many individuals and organizations have embraced the technology with open arms, the same cannot be said for governments, who frequently highlight only its risks, without considering its benefits

But the tides are changing. As more individuals and businesses begin to take a more ESG conscious approach to the way they spend and operate, cryptocurrencies like Bitcoin will inevitably fall into place as the ideal solution. Since the technology was built to change lives and provide a more equitable and sustainable economic model, it’s likely it will continue to evolve toward that purpose in the months and years to come.

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About Master Ventures

Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.

Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.

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