Sustainable Investors Eliminate Cryptocurrencies From Cryptocurrency

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Author’s Note: This article focuses on environmental considerations and identifies options for sustainable or ESG investors who may want to invest in more energy-efficient alternatives, bearing in mind the highly speculative nature of investing in cryptocurrency.

In the 13 years since the publication of a white paper that launched the digital wave of cryptocurrencies with the introduction of Bitcoin, the market capitalization of cryptocurrencies has exploded to over $ 2.23 trillion with over 13,506 of these currencies existing. The cryptocurrency market is highly concentrated with the top five types, Bitcoin, Ethereum, Binance Coin, Tether and Solana, accounting for over 72% of the market capitalization.

Cryptocurrency is a decentralized digital currency that relies on distributed ledger technology to keep ownership records and transfer ownership from one user to another, often with little or no information about the owner’s identity. Unlike the US dollar or the euro, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these assets are widely distributed among cryptocurrency users via the internet in the form of a blockchain.

Blockchain is a bit like a checkbook spread across countless computers around the world. Transactions are recorded in “blocks” which are then linked together on a “chain” of previous cryptocurrency transactions. With a blockchain, everyone who uses a cryptocurrency has their own copy of this book to create a unified transaction record. To prevent fraud, every transaction is verified using one of two main validation techniques: Proof of Work (PoW) or Proof of Stake (PoS).

This validation process, known as the “mining process”, has been the subject of increasing attention from sustainable and ESG (i.e. environmental, social and governance) investors, due to the high energy levels and resulting greenhouse gas levels. used. The PoW validation method uses a consensus mechanism that requires computers to solve complex mathematical problems that can require an intense amount of computer power and electricity:

Estimated energy consumption per cryptocurrency transaction, in KWh. (Graph via ImpactPHL)

For example, Bitcoin’s annual electricity consumption is estimated to be equivalent to that of the country of Thailand. The less used PoS, introduced in 2012, reduces the amount of energy needed to control transactions because the number of transactions each person can verify is limited by the amount of cryptocurrency they are willing to “bet” or temporarily lock up in a municipal safe.

The new validation techniques are said to consume much less energy and / or rely on renewable energy sources. For example, Chia describes itself as green money for a digital world and uses a new consensus algorithm called Proof of Space and Time to validate transactions. Another example is Nano, a digital currency network that shuns traditional mining practices in favor of a greener solution, known as Open Representative Voting.

Michael Cosack. (Courtesy photo)

Ultimately, the lack of transparency and data makes it extremely difficult to indicate that one currency is “greener” than others. For this reason, the recently announced lineup of the Cryptographic Climate Agreement it is a positive development for sustainable investors and other stakeholders. The Agreement represents a collaborative effort by the private sector to decarbonise the cryptocurrency and blockchain industry with the ultimate goal of achieving net zero emissions from the electricity consumption associated with all respective cryptocurrency-related operations by 2030.

While the focus of this research article is limited to environmental impact, cryptocurrency investors should be aware of the potential social and governance risks and opportunities of cryptocurrencies (e.g. valuation, risk management, ransomware, fraud, breaches of human rights, etc.). According to research recently published by MSCIthere are at least 52 public companies that have exposure to cryptocurrencies.

Investors attracted to cryptocurrency should keep in mind that this is a highly speculative new investment with a limited history. For sustainable investors, options and considerations include promoting better disclosure, transparency and switching to renewable energy sources, considering energy-efficient cryptocurrencies and / or offsetting emissions through the purchase of credit carbon.


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