Amid sustained bearish price action in the crypto markets, concerns surrounding Bitcoin’s energy usage remain pervasive. Prominent politicians, CEOs, and even comedians are taking both sides of the debate—often opting for controversy in lieu of objectivity. Notably, talks of assigning sustainability grades to individual bitcoins are gaining traction, threatening Bitcoin’s fungibility in an effort to address investors’ environmental concerns. However, the market’s appetite for graded bitcoins remains to be proven. Will demand for graded bitcoins sculpt the future of the network’s relationship with the environment, or will preexisting forces help Bitcoin stand the test of time? At Sarson Funds, our mission is to dive deep into issues like these to deliver fact-based, world-class investor education and portfolio management.
Last week, El Salvador made history as the first country to adopt Bitcoin as legal tender. The move is widely claimed by supporters to be aimed at improving financial inclusion for the ~70% of unbanked Salvadorians. Yet, days later, political figures like Donald Trump and Elizabeth Warren both denounced Bitcoin for fear of its competition with U.S. monetary policy and its impact on the climate. Adding to the confusion, prominent technologist and environmentalist Elon Musk recently made conflicting remarks both for and against Bitcoin’s case as a technology that hastens renewable energy development. Even Kevin O’Leary, who rejected Bitcoin for years as a “giant nothing-burger”, has reversed his stance and now loudly supports Bitcoin as an asset that will outperform the S&P 500 in the coming decade.
O’Leary posits that greener practices will drive up institutional demand for Bitcoin. According to him, “Most of these institutions have both ethics and sustainability committees that filter offerings before they’re allocated on the investment committee. They’re not just singling out crypto.” A popular, generalized category of investment screening methods for these committees is called “ESG”, which stands for environmental, social, and governance. As ESG mandates gain adoption, entities seeking investment face growing incentives to fulfill ESG mandates.
To help ESG-focused institutions justify investing in Bitcoin, O’Leary is pushing to “wrap” bitcoins based on the alleged sustainability of their origin. Essentially, “wrapping” bitcoins on the blockchain would involve tagging them with varying grades depending on the energy mix of the mine they originated from. With the ability to verify the environmental sustainability of a given bitcoin’s origin, investors could theoretically invest in the leading crypto asset without contributing toward demand for environmentally destructive energy sources.
On the other hand, demand for wrapped “green” bitcoins is yet to be proven. To understand why, Anthony Pompliano interviewed CEO Fred Thiel of Marathon Digital Holdings, one of the largest Bitcoin miners in North America. Marathon responded to growing ESG demand by developing “virgin” OFAC compliant bitcoins mined with purely sustainable energy. However, these bitcoins failed to garner investors. Thiel described the experience, stating, “What we quickly learned, however, was that the financial institutions weren’t willing to pay extra for that bitcoin. So it’s kind of like saying ‘all bitcoin really are the same, but we’d like to be able to say (this is the financial institutions) that the bitcoin we buy are sustainably mined and are fully OFAC compliant’. But if they [institutions] are not willing to pay for that, then there’s no reason to do it.”
So, it seems that institutions are playing both sides. On one hand, they are buying Bitcoin at unprecedented rates. On the other, they want to continue attracting investors by fulfilling ESG mandates. As Thiel describes, “I think part of it is very much virtue signaling by the institutions because there are activist investors holding them to that mandate.” Thus, “green” bitcoins appear to be more of an advertisement than a technology.
Contrary to the narrative most media outlets are selling, we believe that Bitcoin and ESG will not only continue to coexist but will actually continue to propel one another as complementary forces. Thiel continues, “Miners really have an incentive of becoming more environmentally sustainable. It’s the right thing to do, not just for the planet but for the industry.” In other words, the economic incentives underlying the Bitcoin network are aligned with sustainability as miners compete for increasingly low-cost energy. Demonstrating this concept, Marathon has committed to carbon neutrality for their next deployment of 70,000 miners in accordance with their carbon neutrality objectives.
Few understand how Bitcoin, its surrounding ecosystem of crypto assets like Ethereum, and the electrical grid interplay to impact the long-term outlook on the environment. Previously, we have cited research showing how demand for Bitcoin accelerates clean energy network expansion through an economic mechanism known as “energy arbitrage”. In his interview with Pomp, Thiel cites another example of this concept in practice:
“The biggest problem in power today is not that there isn’t enough of it that’s green, it’s it can’t get to the right places. And that’s a grid and distribution issue. 200 gigawatts of power is lost a year in this country just by heat in distribution lines. And you could mine a lot of Bitcoin if you just put that base load on a facility where they’re doing solar or wind. And until battery storage technology gets there, I think you’re going to find Bitcoin miners are the key drivers of investment in renewable energy.”
Published in September 2020, The 3rd Global Cryptoasset Benchmarking Study from the University of Cambridge cites that “on average 39% of proof-of-work mining is powered by renewable energy, primarily hydroelectric energy.” In comparison, renewable energy’s share of global electricity generation was only 25% in 2019. More recently, CEO Jiang Zhuoer of a leading Bitcoin mining pool called BTC.top claimed that miner clean energy usage now exceeds 50% in the aftermath of mining facilities in Xinjiang, Inner Mongolia, and Qinghai provinces being shut down.
Miners’ eagerness to bring transparency to their operations is a good sign. Recently convened by Microstrategy’s Michael Saylor, the Bitcoin Mining Council seeks to “…promote transparency, share best practices, and educate the public on the benefits of Bitcoin and Bitcoin mining.” Pursuant to these goals, the council will provide a voluntary disclosure forum for miners to share energy sources. Looking forward, Sarson Funds will closely monitor the council’s quarterly meetups to track trends in Bitcoin mining.
So long as individuals, institutions, and governments continue to embrace decentralization, we expect the increasingly informed public to view Bitcoin and other crypto assets as environmentally progressive technologies. In contrast to the perils of the petrodollar, we are optimistic about the future of states leveraging their climate’s unique mix of renewable energy sources like Iceland and El Salvador have. If DeFi applications continue to mature and take market share from legacy financial institutions, electrical demand for banks should diminish. If this idyllic vision is fully realized, the future of finance will be powered by a decentralized, transparent, and unbiased monetary system secured by sustainable resources worldwide.
By Nathan Frankovitz
Disclosures: Not investment advice. It should be assumed that Sarson Funds or its affiliated managers hold positions in all projects that are discussed. It is not possible to invest in any project directly through Sarson Funds, Inc. or its affiliated managers. Any investment product offered by managers affiliated with Sarson Funds should be assumed to be only available to Accredited Investors and subject to the individual terms and conditions of that offering including but not limited to those eligibility requirements associated with U.S. Securities Regulation D, section 506c. Talk with your financial advisor before making any investment decisions or have them contact Sarson Funds directly at [email protected]
