Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

You’ve probably heard a fair bit about Bitcoin recently. Its eye-watering price fluctuations mean the cryptocurrency is never far from the headlines. It’s also begun to shake off the outsider reputation to gain acceptance as a legitimate alternative asset class. Morgan Stanley and Goldman Sachs are among a number of big banks now looking to offer it to their wealthy clients.

But for all that, I bet you haven’t heard much about its environmental impact. 

Bitcoin consumes a staggering amount of energy. According to the Cambridge Bitcoin Electricity Consumption Index, the entire Bitcoin network consumes more energy annually than countries such as the Netherlands, the Philippines and Switzerland. 

And, as Bitcoin’s price rises, so does the energy consumption. This makes it a serious environmental threat. According to a recent study, “the growing energy consumption and associated carbon emission of Bitcoin mining could potentially undermine global sustainable efforts.”

The reason why Bitcoin is so carbon intensive is because of the ‘mining’ process used to transact it. First, highly sophisticated computers solve extremely complex mathematical problems to produce new bitcoins. Specialist ‘miners’ then verify the legitimacy of bitcoin transactions on something known as the blockchain. 

Back in 2009 when Bitcoin was created, you could mine it using an average computer. The sums behind the process were relatively simple. But, just as it becomes harder and more laborious to dig for oil as supplies dry, the transaction process has been designed to become increasingly difficult as time goes on. The Bitcoin supply is finite - only 21 million coins will ever exist - meaning that the more it’s mined, the harder and more complex the algorithms become to access it.

Now, it’s a painstaking process. It’s long, complex and, crucially, consumes vast amounts of electricity. The computers required to mine Bitcoin are extremely sophisticated. Factories full of them are constantly churning through electricity to solve increasingly difficult arithmetic.

There are those who dismiss the environmental implications, saying that Bitcoin can be mined using electricity from renewable sources. What we see in practice, however, is miners using whatever electricity is cheapest. That typically means heading to areas that use a lot of coal.

And though the world is slowly transitioning toward renewable energy sources, cheap coal and other fossil fuels still count for the vast majority of the world’s energy supply. 

Things will get worse before they get better. According to the International Energy Agency’s latest forecast, 2021 is set to see the second-largest annual increase in energy related carbon emissions. Energy demand is set to increase by 4.6% this year, more than offsetting the largely pandemic-induced 4% contraction over 2020. 

The report highlights how demand for fossil fuels in particular is expected to grow significantly over 2021, with coal demand alone projected to increase by 60% more than all renewables combined.

The problem is not going away, and miners are not turning to renewables. All this means investors should view Bitcoin as one with meaningful ESG risk. The link between problem and investment is explicit. It is by design that Bitcoin consumes more energy the higher its price rises. 

The extent of Bitcoin’s environmental impact remains relatively unknown to most people, for a few reasons. To start, high-profile supporters threaten to pull the wool over investors’ eyes. Consider the fact that Tesla recently invested $1.5 billion in bitcoin. Perhaps you’ll think that jars with the company’s “mission” to “accelerate the world’s transition to sustainable energy.” Indeed, it perfectly offsets the $1.5 billion Tesla received in taxpayer-funded environmental subsidies over 2020. 

Then there’s the fact that Bitcoin is tricky enough to get your head around as it is. As the comedian John Oliver put it, Bitcoin is “everything you don’t understand about money combined with everything you don’t understand about computers.” 

While it’s easy to see why an oil company is not good for the environment, it’s harder to understand the adverse effects of Bitcoin. That doesn’t make them any less real.

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