When Elon Musk does something, the world takes notice. Although the Tesla CEO’s appearance on US comedy show Saturday Night Live last weekend was panned by critics, his performance elsewhere has been indisputable. Earlier this year, when his car company invested US$1.5bn in bitcoin, it was reported that it had gained US$1bn in just ten weeks. Even corporate treasurers began to take notice of the serial entrepreneur’s latest antics.
In a filing with the Securities and Exchange Commission, Tesla noted it had invested in bitcoin to give it more flexibility in diversifying and maximising its returns on cash. And in an earnings call, the company’s chief financial officer commented he was pleased with the liquidity of the bitcoin market. Other corporates have been wondering whether to follow suit and hedge their assets in a similar way.
Although the jury is still out about whether the bitcoin buzz has reached its peak, and is a bubble about to burst, there are now other reasons for investors to pause. For treasurers considering a bitcoin investment, the environmental impact of mining new coins could be a conflict with their ESG [environmental, social and corporate governance] agenda.
There is a growing awareness of the huge energy resources needed to mint – or mine – new bitcoins. On Earth Day recently, for example, there were protests in upstate New York about one power station’s use of natural gas – and subsequent pollution – to mine the cryptocurrency. Greenidge Generation, which describes as a “powerplant-cryptocurrency mining hybrid”, has been using its excess energy to mine bitcoin, which has drawn the ire of local environmental protestors.
As a decentralised currency that is not issued by a central bank, bitcoin relies on a distributed network of computers to verify the creation of new coins. The mining process involves a cryptographic task, and those that are able to validate new transactions, and provide a ‘proof of work’, have been rewarded for their efforts with new bitcoins. As the number of bitcoins in issue grows, the computation becomes harder, thus requiring more computing power – and more energy.
In practical terms, the amount of electricity consumed by this bitcoin network is enormous. Imagine all the home devices in the United States that are on but not being actively used. The amount of electricity used to keep them on is the same as the energy needed to power the bitcoin network for 18 months. And the amount of electricity consumed by the bitcoin network in one year could power all the kettles in the UK that are boiling water for tea – for 33 years.
These estimations come from the Cambridge Bitcoin Electricity Consumption Index (CBECI), provided by Cambridge University’s Centre for Alternative Finance. Its research notes that approximately 65% of the bitcoin mining is done in China, and there are more efficient ways to do it. For example, hydro power could power the entire bitcoin network 28 times; biofuels and waste could power it four times, and solar, wind and other energy could power the entire bitcoin network nine times.
CBECI tracks the energy consumption of the bitcoin network in real-time, giving an estimate of the energy used in the previous 12 months. On Saturday 8th May, for example, (when Musk was doing his Saturday Night Live skit), the annualised estimated consumption stood at 148.40 terawatt hours (TWh). This figure compares with the energy consumption of entire countries and bitcoin’s usage ranks between Malaysia (which is a little less at 147.21 TWh) and Egypt (150.58 TWh).
Such figures are massive for a currency that is still on the fringes of corporate finance. And despite the potential gains from a bitcoin investment, these environmental concerns are dampening the enthusiasm of investors who also have to consider an ESG agenda.