From an environmental and legal point of view, cryptocurrencies can be viewed critically. However, they are gaining ground in terms of social standards and potential use-cases.
Bitcoin — the New Digital Gold?
The different functions of money have been described and specified more than a hundred years ago:
- Medium of exchange
- Measure of value
- Standard of deferred payment
- Store of value
Since gold offers these properties, it is accepted as an alternative currency.
Gold is particularly rare in times of merging monetary and fiscal policies and an incredible amount of printed money. The entire gold deposit mined to date would fit into a cube with an edge length of only 21.71 meters (197,575.7 tons, source www.gold.de, end of 2019).
This natural scarcity is similar to cryptocurrencies like bitcoin, which is limited to 21 million units. It is therefore not surprising that bitcoin shares the same properties as gold in view of an expected inflationary environment.
The “Magic Triangle” With Four Corners
In modern asset management, the “magic triangle” of investment with the sub-goals of return, risk, and liquidity is being expanded to include a fourth dimension: the environment. Especially due to the COVID-19 pandemic, the sustainable investment market skyrocketed. Have a look at The World After Corona From an Investment Perspective
Institutional investors, in particular, are increasingly striving to make investment processes even more robust, also identifying non-financial risks and thus to avoid extreme events (“tail risks”).
The precious metal industry has already largely adapted to these additional sustainable requirements for mining and trading, offering correspondingly certified gold bars. For an investment in bitcoin, this optimization is still pending. Under certain circumstances, there is an irresolvable, inherent contradiction between the generation of Bitcoins and far-reaching sustainability aspects. However, more modern coins such as Ethereum 2.0 are promising huge improvements in that regard. Have a look at “Is There Still Some Potential Left in Cryptocurrencies?”
“Proof of Stake is very welcome from an environmental point of view. This solves the previous, rightly criticized problem that mining consumes an extremely large amount of electricity,” says blockchain expert Bernhard Blaha of Cryptix
Bitcoin and the Environment
Ulrich Gallersdörfer, a computer scientist at the Technical University of Munich, presented a widely respected study on the environmental balance of Bitcoin in 2019. According to him, seemingly inconsiderable applications such as video game consoles, streaming services, search engines, or even social networks achieve a similar energy consumption as those cryptocurrencies that are comparatively energy-efficient to produce. Bitcoin, however, ranks at the upper end of this scale. A conceivable substitution by “renewable energies” would be too short-sighted, as such compensation would ultimately have to be made to a considerable extent via fossil fuels. The approach of using waste products from oil production, which would otherwise escape into the atmosphere (methane gas), to operate mining computers is discussed ambivalently. Other voices also direct the view away from an absolute to a relative consideration. For example, electricity consumption in connection with bitcoin mining reaches the size of countries like Chile or Switzerland.
On the other hand, Bitcoin with the underlying blockchain can make up ground in terms of compliance with social standards. Global supply chains can be clearly documented so that products paid for with Bitcoin can be verified for their compatibility with minimum wages, labor protection laws, and the ban on child labor. The actual use of funds from the “green bonds” could also be reliably tracked.
Still, blockchain-based Bitcoin transactions are comparatively slow (seven transactions per second compare with more than 44,000 payment transactions via MasterCard in the same period). We will see in the future if altcoins are able to solve this problem. With Ethereum 2.0, among other things, the consensus procedure should be changed from the computationally intensive proof-of-work procedure to a so-called proof-of-stake procedure. In the long term, the changes are intended to increase the transaction capacity from currently 15 transactions per second to several thousand transactions per second.
As a Currency
Fortunately, Bitcoin payments can be carried out very cost-efficiently, so that international transactions using traditional payment gateways, such as Western Union with fees of up to 7.5%, become redundant. Transfers by expatriates could free up financial resources that can be used for further development efforts in their home countries, where the banking landscape is often relatively weak. It is therefore not surprising that large sections of the population from economies with unstable local currencies and political infrastructures are large holders of Bitcoin (Nigeria (32%), Vietnam (21%), South Africa (17%), source: www.statista.com). The downside of such an opportunity to democratize financial services lies in its misuse in the context of money laundering and corruption. Last but not least, the blockchain does not forget a bitcoin payment, which could be in conflict with the “EU General Data Protection Regulation” (GDPR) and the associated “right to be forgotten”.
The Brussels authority wants to regulate crypto assets in the future and thereby reduce risks for the financial markets. At the same time, the new regulation called “MiCa” (Markets in Crypto-assets regulation for EU crypto-assets and their service providers) is intended to provide a reliable legal framework in which the innovative financial products can develop well. “The future of the financial world is digital”, Valdis Dombrovskis ( European Commissioner for Trade) said. In that case, it may be possible that cryptocurrencies are widely being accepted. — Is There Still Some Potential Left in Cryptocurrencies?, Maximilian Perkmann, 2020
Conclusion: Cryptocurrencies As An Investment
Considering the ESG (Environmental Social Governance) aspects and the highly speculative character, cryptocurrencies are not entirely suitable for all investors. Looking at the future though, cryptocurrencies and the underlying blockchain have still some interesting use-cases to solve. The future will tell if upcoming and promising technologies such as Ethereum 2.0 will be able to reduce the environmental impact.