Bitcoin ESG Concerns Might Slow Institutional Adoption, for Now

Bitcoin’s environmental concerns, pushed to the forefront by Tesla CEO Elon Musk, could slow big investors’ push into the cryptocurrency, but the market pause might be temporary, according to analysts and industry executives.

“Crypto needs to address renewable energy, and then it will be able to resume its bullish trend,” Edward Moya, senior market analyst at the brokerage firm Oanda, told CoinDesk in an interview.

Musk’s about-face earlier this month on letting electric-vehicle buyers pay in bitcoin – due to the potential adverse climate impact from energy-intensive crypto mining – has cast a pall over digital-asset markets.

That’s partly because investor demand for bitcoin as a potential inflation hedge was one of the biggest narratives contributing to the largest cryptocurrency’s price gains over the past year.

But now that trend has run headlong into another front-of-mind consideration for big investors: environmental, social and governance factors, known as ESG. Larry Fink, CEO of BlackRock, the world’s largest money manager with $9 trillion of investor assets, wrote earlier this year in an annual shareholder letter that there’s a “sustainability premium” for investments with better ESG profiles.

It’s no secret that bitcoin mining takes a huge amount of electricity. A widely cited study by the University of Cambridge Centre for Alternative Finance estimated that the energy used by bitcoin mining exceeds the consumption of countries such as the Netherlands and UAE.

So Musk’s calling attention to the bitcoin ESG issue may force big investors to address the concerns before rushing in.

Michael Sonnenshein, CEO of the crypto fund firm Grayscale Investments, said Tuesday in a panel discussion at CoinDesk’s Consensus 2021 conference that he isn’t yet hearing from investors that environmental concerns have “somehow become a deterrent.” But he acknowledged that “it suddenly feels like more light is being shined on this one area.”

MicroStrategy CEO Michael Saylor, who has been one of the most vocal advocates for companies buying bitcoin for their corporate treasuries, noted at the CoinDesk conference that Musk’s tweets “caused bitcoin to dominate the news cycle all last week across mainstream media.”

“I think it became pretty clear that we have a good bitcoin story, but it's a very complicated story,” Saylor said.

Bitcoin prices have tumbled 34% in May to around $38,000, the biggest monthly drop since November 2018.

Saylor announced this week that he hosted a meeting between Musk and cryptocurrency miners to discuss the bitcoin ESG concern, and that the duo have created the Bitcoin Mining Council to produce data on miners’ energy consumption.

“That will give institutional investors comfort as they enter the space, and not cause them pause,” said Saylor. “I think the corporations would have the same thoughts that any other institutional investor has. They just want to be educated.”

A recent survey of 600 people in the fund management industry found that 96% expected their firms to increase the prioritization of ESG this year. John Reed Stark, former chief of the U.S. Securities and Exchange Commission's Office of Internet Enforcement, thinks that the bitcoin ESG concern will certainly dampen institutional investment in crypto.

"There are very powerful reasons why the ESG argument could get enormous traction," said Stark, now an independent consultant specializing in digital compliance and a senior lecturing fellow at Duke University School of Law. "If companies want to appeal to millennials, the best way to do it is to show how environmentally friendly they are."

So far the signals are mixed.

BlackRock's Fink was asked Wednesday at the company's annual shareholder meeting whether the firm would invest in bitcoin, according to Reuters.

“The firm has monitored the evolution of crypto assets," Fink said. "We are studying what it means, the infrastructure, the regulatory landscape.”

Jason Guthrie, head of digital assets at the exchange-traded fund specialist WisdomTree, says the bitcoin ESG concerns might still be too daunting for some would-be investors. Those who still want to get into digital assets might go straight to alternatives like ether, the native cryptocurrency of the Ethereum blockchain, he said.

Ethereum’s blockchain currently runs on the same energy-intensive “proof-of-work” security system that bitcoin uses, but it’s planning to shift to an alternate known as “proof-of-stake” that requires substantially less electricity to operate.

“There’s definitely going to be a subsection of institutions that were on the sideline, looking to move in, and will make their first move into Ethereum for this reason,” Guthrie said.

'Stupid dialogue,' not stupid ESG

Sam Bankman-Fried, CEO of the FTX cryptocurrency exchange, said during CoinDesk TV’s "First Mover" show Tuesday that “even within proof-of-work, it’s not prohibitively expensive to buy carbon offsets, and that’s something we’ve been looking into and pledged to start doing, to offset the energy usage that FTX has.”

“It’s a healthy occurrence in some ways because I think there was a lot of stupid dialogue going on about ESG, and stupid not in the sense that ESG was stupid, but that the dialogue was,” Bankman-Fried said.

Bankman-Fried tweeted last week he figures that for every $1 spent on blockchain fees a donation of $0.0026 would cover the needed carbon offsets.

Moya, the Oanda analyst, said that with the amount of institutional money backing crypto, the industry might be able to develop environmentally-friendly technological advancements or other ways of addressing investors’ concerns. That’s key partly because ESG concerns are so important to millennials. The pressure on the bitcoin industry to adapt was inevitable and might turn out to be a good thing.

“This is just a temporary slowdown,” Moya said.