Cryptocurrencies are not considered sustainable per se
ESG criteria partially met
Investors must make priority decisions
Sustainable investments are playing an increasingly important role for investors. Anyone who invests responsibly and applies ethical, social and ecological criteria, but at the same time wants to generate income, cannot avoid looking at the cryptocurrency market. Trading in cryptocurrencies such as Bitcoin, Ethereum & Co. is worth a look, especially from the point of view of returns. As cryptocurrencies continue to go mainstream, the market continues to be worth trillions despite massive recent losses. The return opportunities in the sector remain high – but so does the risk in view of the high volatility.
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Sustainability criteria under the magnifying glass
Sustainable investments are characterized by the consideration of special criteria. In this context, the term “ESG” has become established, which combines criteria from the segments environment (environment), social (social) and responsible corporate management (governance). Investments that score in these three categories are generally considered sustainable investments. But how much ESG is in cryptocurrencies like Bitcoin?
Environment: Cryptocurrencies and the environmental aspect
If you take a closer look at cryptocurrencies from the point of view of the consequences for the environment, the conclusion for cyber currencies is at least mixed to negative. There is a high demand for electricity for the generation of cryptocurrencies and for custody. The blockchain requires a worldwide computer network to carry out crypto transactions, but also to mine Bitcoin and Co. The high computing power entails massive energy consumption. In addition, especially in countries where excessive crypto mining is practiced, the electricity costs are comparatively cheaper, but renewable energies are only rarely an issue when generating electricity.
How high the electricity consumption in the crypto sector actually is is evaluated differently by experts. The estimates differ widely: while the University of Cambridge estimates the annual energy consumption for the sharpening of cryptocurrencies at 143.67 TWH in its “Cambridge Bitcoin Electricity Consumption Index”, the “Digiconomist” calculates with 97.26 TWh, Dan Held from Ark Investment, meanwhile, comes to a much smaller number with an estimated 50.8 TWH. Estimates of the energy consumption of transactions on the blockchain also vary widely. However, experts agree that the energy requirements of cryptocurrencies are high, especially since the energy mix is difficult to determine. Cryptocurrencies, crypto transactions and the custody of cybercurrencies as well as all work related to the blockchain are energy-intensive and therefore hardly compatible with the “E” of the ESG criteria.
However, one must also point out that Fiat currencies also leave a significant CO2 footprint. Currency systems based on paper money are not only environmental polluters in connection with the production of currencies, transport and custody also run counter to ESG criteria.
Social criteria – partial success for Bitcoin & Co.
Social and societal aspects are also a criterion for sustainable investments. When looking at the social justice issue, cryptocurrencies can score – depending on how you look at it. In particular, the independence of banks and governments make cyber currencies a tool for participation. This was also confirmed some time ago by Charlene Fadirepo, a former audit manager at the Federal Reserve Board of Governors, in an interview with Yahoo Finance, citing in particular the group of black Americans, for whom bitcoin is a “tool for social justice”. Cybercoin would create a level playing field, especially for people who would be disadvantaged by traditional banks. “If you think of black Americans, we believe that bitcoin is [uns] enables generational wealth to be built up. And not just Black Americans, Latino Americans, the LGBT communities, and Indigenous communities. It enables communities to build wealth in communities that have been excluded from the discriminatory banking system we have today.”
Irrespective of this, critics of cryptocurrencies are now arguing that the social criterion does not play a role with Bitcoin & Co. They also point out that crime in the crypto segment is high – due to the extensive anonymity, which proponents in turn see as positive. The fact that there are hardly any identity checks when opening a wallet, for example, is a paradise for criminals. The blockchain analysis company Chainalysis recently gave the crypto market a devastating verdict in its “Crypto Crime Report 2022”: Crime in the crypto market has reached a new record high. In 2021, a total of around 14 billion US dollars in cryptocurrencies were transferred to illegal addresses. The amount stolen through fraud – such as so-called “rug pulls”, in which developers collect funds from their victims for alleged projects via tokens and then disappear without a trace – rose by 82 percent compared to the previous year to 7.8 billion US dollars, while crypto Thefts – for example through successful hacks – increased by a whopping 516 percent to 3.2 billion US dollars. The trend towards more crypto thefts is continuing in the current year.
Governance – Also an issue with BTC and ETH
Governance structures that are common in companies are only partially found in the crypto segment. Against this background, an evaluation of corporate management and corporate culture from an ethical point of view must be carried out differently than in companies, because the decentralization of cryptocurrencies makes it difficult to apply typical corporate structures.
Nevertheless, ethical criteria can be worked out that enable a judgment to be made as to whether the “G” in ESG can be applied to the crypto market. The first thing to mention here is transparency, which also plays a role in traditional companies. While in (listed) companies, for example, the management level is forced to act transparently and make potentially market-moving news available to everyone as quickly as possible, there are obviously no two opinions about the transparency of the processes in the crypto market. The source code is publicly available, transactions on the blockchain can be traced and cannot be changed afterwards. Against this background, the world’s largest cryptocurrency Bitcoin is not anonymous, but pseudonymous: Transactions can be assigned to addresses, associated parameters are publicly viewable.
In addition, blockchain transactions are open to everyone, the network offers equal opportunities. This is so often not the case in classic corporate structures that the complete neutrality of human-led projects, groups or corporations is in doubt.
If you set the right standards, the crypto market can definitely score points in terms of governance.
How much ESG is really in crypto?
A final conclusion on how sustainable crypto investments actually are cannot be made clearly when taking a closer look at the ESG criteria. Those who rate the environmental aspect particularly highly are unlikely to classify Bitcoin & Co. as a sustainable investment, while those who value social participation and transparency are likely to judge the situation to the contrary.
Above-average returns can certainly be achieved with crypto investments – but so can above-average losses. The fluctuations in the digital currency market are high, one of the reasons why ESG experts do not count cryptocurrencies as worthwhile investment targets. In principle, cybercurrency investments are not a classic ESG investment, but sustainable crypto investments do not yet represent a contradiction in terms. In fact, investors must weigh problem areas such as money laundering, high electricity consumption and shadow banking against transparency and social inclusion.
Editorial office finanzen.net
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