Is mining Bitcoin an environmental hazard or bastion for illegal activity? Or do environmental and transparency concerns overshadow Bitcoin’s benefits, such as financial inclusion? We tackle Bitcoin’s big ESG questions in our latest episode.
This transcript has been generated by an AI tool.
00:11 - 01:11
Hello and welcome to On Purpose. I'm your host, Travis Allen, senior investment strategist and national director of Purpose Driven Strategies at Bernstein. Today, I'm thrilled to be joined by Will Johnson. Will is a portfolio manager for our sustainable thematic equity portfolios at AB. He joined AB in 1998 as a research analyst covering banks and has covered financials for the last 25 years. Earlier this year, Will wrote a blog discussing the environmental, social and governance concerns, controversies around bitcoin and other cryptocurrencies, and he really highlighted some misunderstandings that exist out in the market about just how much energy use goes towards mining bitcoin, and also highlighted some of the opportunities for bitcoin and other cryptocurrencies to spread access to financial services and provide a means for financial inclusion. So today, I'm thrilled to have this conversation with Will. Will, welcome to On Purpose. We're glad to have you here.
01:11 - 01:12
Thanks for having me.
01:12 - 01:33
Let's maybe start by addressing some of the controversies that are out there, especially starting with the objection around energy consumption. Can you help us understand how to interpret the environmental impact of cryptocurrencies?
01:33 - 02:11
Yes. Well, if you take a very high level view and look at how much energy is consumed globally, it is in the region of 170,000 terawatt hours a year. Energy obviously is a very good thing, and to consume it for electricity has lifted people out of poverty, and there's a direct correlation between the use of energy and the reduction in poverty. So if you look at the aggregate level of energy globally of 173,000 terawatt hours, Bitcoin's network only consumes less than 100 terawatt hours, so that is less than 0.1 percent. So it's actually very small.
02:11 - 02:51
OK. Then you have to look at why do you consume electricity. I mean, Bitcoin as a network is really securing a network of over a trillion dollars of value and it is equivalent to a digital Fort Knox. As a payment network to store value, it has a very critical function, and the other side of it is that the amount of energy it's consuming is actually becoming more efficient. It's moving on to renewable energy, but also the asset miners, which are funding the structure of Bitcoin are becoming more efficient with increasing and faster technology, so they consume less electricity.
02:51 - 03:38
So the difference between the latest asset miner is one-fifth of the power output. So you've seen a five-fold increase in the amount of energy efficiency, but also in terms of renewables, 30 percent of all world energy is what they call curtailed or wasted, and the bitcoin miners are looking to consume the lowest cost, rather the lowest marginal cost of electricity. Their energy costs range between two and four cents a kilowatt hour. This is compared to what we consume in the West of 25 to even up to 35 cents a kilowatt hour in Germany. So the bitcoin miners need to find the cheapest form of electricity, and that now tends to be found in renewable energy areas where there is trapped energy.
03:38 - 03:40
Oh, that's interesting. Tell me more about that.
03:40 - 04:03
Well, you have trapped energy in hydro power or construction dams, where at certain points in the day, they can't redeploy enough electricity into the grid, so the supply exceeds demand. And in fact, they have negative costs, and Bitcoin miners are able to consume at a negative energy rate, which is better for the actual power companies.
04:03 - 04:41
You're seeing the same capacity in terms of solar, where the actual solar demand over the day actually doesn't fit the consumption of the actual grid. And during the daylight hours where people are at work, they are generating the most amount of electricity. So during that dead period, you can plug in the bitcoin mining network, so it actually helps to reduce... will balance the grid more effectively. Right? So the carbon footprint of the bitcoin network is going to reduce very significantly, and there are measures to take place that, you know, it could actually reduce significantly where 100 percent of the... of the network will be mined from renewable energy.
04:42 - 05:32
I was just going to say, Will, that I think it's amazing to hear you share what's happening because so little of that has been reported. That bitcoin mining activity, it makes sense that they go towards the lowest energy sources and are utilizing some of the excess capacity from renewables at times where that capacity is not fully in use. But I think, you know, one of the things that surprised me most in your answers – just to think about this in terms of bitcoin and other cryptocurrencies as a means of providing financial services, which I know we're going to talk about in a bit, and comparing the energy use to what we see from traditional financial institutions of similar size is just a really... a point I hadn't thought about and I haven't seen many other people write about.
05:32 - 06:31
If you look at comparison, say, for example, with mining gold, the carbon emissions and energy is at least triple what the bitcoin network actually outputs. And if you are running the entire banking network, you know, banks are about 20 percent of the global economy in terms of GDP. So they consume huge amounts of energy with people commuting to and from their offices, you know, powering the offices, you know, actually maintaining the data centers. So there is a sort of another hidden cost that we don't actually measure. And if you look at something like a steel, steel carbon emissions are 128 times the level of the bitcoin network. So it's a lot of narrative people comparing bitcoin's energy consumption, say, with a small country. But when you're considering that the network is a trillion dollars worth of value, it is many times the actual GDP of a small country. So you have to consider what is the actual benefit of creating the world's largest decentralized payment network.
06:31 - 06:54
And let's move on to one of the other controversies that surround crypto assets and talk about the usage in illicit trade. That was, I mean, especially early on, one of the narratives, right? The fact that it's anonymous, will allow people to do illegal things without reducing the probability of being caught. And that's a terrible thing for society. So how do you respond to that objection?
06:54 - 07:41
Well, it is pseudo anonymous, but when a transaction is made on the bitcoin blockchain, it is secure. It is actually printed forever. It is secured in one of the blocks and you can go onto the internet and look at every single transaction that has come out of the internet on the blockchain. So it is a very bad place for a criminal to leave any trace of where they've transacted. And also, you know, the most up-to-date forensic analysis of the blockchain would suggest that only 0.3 percent of the network has been used for nefarious and criminal activity. That compares with three and a half percent of global GDP at the moment, so the actual bitcoin network is now really not used for any nefarious activities.
07:41 - 07:42
That's really interesting.
07:43 - 08:27
Yes, but you also have to consider the benefits, you know, for 4.2 billion people living in authoritarian regimes. So they've got a payment network and a store of value, such as where to store their wealth, that cannot be seized by a government. And it is actually exclusively owned by the individual who just downloads the app and buys bitcoin or received bitcoin in terms of payment, and they can't be seized. So that is a very important element of the strength of the Bitcoin network. So, I mean, if you go back to the history, obviously there's been the sort of the history of the Silk Road, which, you know, was shut down, obviously it demonstrated that it was a very secure way of trading and sending payments between people.
08:27 - 08:50
So Will, talk to me about one of the other objections, which is that, you know, the price movements of cryptocurrencies have been really volatile. And so and that, you know, can have ramifications. So in El Salvador, for example, as you know, it's now accepted as as legal tender. And so does that in some way introduce risks into developing countries that are looking to make a similar change?
08:50 - 09:41
Well, yes. Bitcoin's price has been very volatile, but it is in a period of price discovery and if anything, it has been volatile to the upside. So you've seen 200 percent per annum increase in the value of bitcoin since it was initiated, which is the fastest growing asset in history. Mm-Hmm. You have seen very significant drawdowns in a lot of the currencies across the world. Most recently, Lebanon has seen a 90 percent fall in the value of its currency in the lira. They shut the banks and so people can't actually get the money out at all. And in Venezuela, you've seen... the peak was 2.6 million percent inflation, which is is staggering. Turkey's seeing the currency devalued, Argentina historically... So the volatility in a lot of these countries where they don't have access to dollar clearing.
09:41 - 10:05
But if you look at how much the U.S. has printed this, you know, since the pandemic, they've printed nine trillion dollars, which is 40 percent of all dollars ever created. So that is creating huge problems for a lot of these economies where they don't have access to dollar clearing. They can't grow their economy as fast as they can print dollars. So it is creating a big headwind of inflation.
10:05 - 10:52
Right, right. In El Salvador, they don't have the ability to print money so they are at the receiving end of this massive inflation of dollars, and El Salvador, as you said, yes, they have moved to recognize bitcoin as legal tender. But if you look at the country, their 25 percent of the GDP is driven by remittances. Now that is a huge figure. Remittances account for very high levels of fees, so you know, it's between 30 and 50 percent of a fee. If you wanted to send something through one of the remittance networks. That would immediately fall if you sent it over the Bitcoin rails. There's something called the Lightning Network, where you can send money instantaneously at the speed of light with virtually no cost.
10:52 - 11:20
And so you make potentially, you know, a very significant saving for all those in El Salvador, and all remittance payments across the world, but also very interestingly, 70 percent of El Salvadorians are unbanked. They have no access to a bank, and the government there has created its own digital wallet, which is basically like a bank in your pocket. So they have airdropped $30 to every citizen who downloads this new app.
11:20 - 11:53
This has had very rapid take-up. There's a lot of criticism initially, but over 30 percent now have adopted this wallet, which is faster than the uptake in banking over the past 30 years. So it is quite dramatic. Well, that's provided for the country. And the other thing about El Salvador, in energy consumption, El Salvador is beginning to mine bitcoin through geothermal energy that is released from the volcanoes. So it's got the most volcanoes in the country, so it is a form of energy for them to mine.
11:53 - 12:15
So we're starting to transition. So we talked about a lot of the objections and you just started to make the financial inclusion case for bitcoin and other cryptocurrencies using the example from El Salvador. But maybe talk more broadly about what is the positive ESG case for bitcoin and other cryptocurrencies.
12:15 - 12:35
I mean, even in the U.S., there are 97 million people who are unbanked or underbanked, and for them, the cost of payment processing is extremely expensive. It costs them two and a half thousand dollars a year. That is up to 10 percent of their income, which is absorbed just by processing payments. That really is not
12:35 - 13:24
So with a network such as bitcoin with the lightning network, as I said, you can send that virtually with no cost at the speed of light. And also, you don't need permission to open a bitcoin address or a wallet. You just need to download an app, so immediately it gives you access to a payment network and you can send payments across the world. So anyone who is working in a foreign country is able to send money to their families at the speed of light at zero cost virtually. So I mean, that is a huge benefit. And if you look at, you know, even in Afghanistan, women are able to download bitcoin wallets and receive payments through that network. So it is a huge source of potential empowerment for individuals across the world where the current banking systems require identity through KYC.
13:24 - 13:54
A lot of people don't have identities if they're immigrants. They don't have an address. They don't have utility bill to prove where they live. I mean, even in India, you have people, for example, they don't have a driving license or their paper version is destroyed. So this offers a huge benefit for financial inclusion and to bank people who are not banked. As I said, 1.7 billion people across the world do not have a bank and there are more smartphones evolving across the world.
13:54 - 14:10
So give us a size for the scope, the current scope of crypto users around the world. And you gave some examples of early signs that there is, you know, significant increase in adoption and becoming more and more mainstream. So just give us a sense for where we are today and where we might be headed.
14:10 - 14:43
Yes, the estimates are that the bitcoin and crypto asset network is servicing 165 million users. And even in the U.S., for example, Coinbase has 65 million users. That is rapid adoption. And the estimates are that we're sort of in the, you know, equivalents of the early years of the internet, in say, you know, 1993-94. And the forecast suggests that by 2025, we could see a billion users of crypto and Bitcoin users globally. So we're at a very early stage of this rapid adoption.
14:43 - 15:16
So as this becomes more and more mainstream, I would imagine that one of the big risks will be regulatory pressures, oversight. You know, one of the... you mentioned Coinbase, one of the interesting things I believe, you can tell me if this is true, but Coinbase talked about making it possible for people to directly deposit their paychecks into crypto wallets. And I feel like that's the type of thing that would immediately get a lot of attention from governmental around the world. So talk to me about the regulatory environment and how that may be a challenge and what some of the trends are there.
15:17 - 15:44
Nation states are rapidly having to evolve. They are behind the curve of disruptive technology, which is basically the native currency of the internet, and a number of countries are banning it. So China has initiated a ban on trading and mining. But how do you ban software and freedom of speech and a code that's driven by mass? It's very difficult. You cannot ban the ownership and mining of Bitcoin.
15:44 - 16:30
So what happens when China banned the mining of bitcoin? It all went to and put it on a jet plane, and it flew to America, which is now the largest beneficiary. In the SEC, they are looking carefully at a lot of the implications of the ICOs, which were the initial coin offerings following Bitcoin, where there were a lot of MeToo type of operations. And there is an issue of whether these are securities or not. And bitcoin is the most decentralized cryptocurrency and there was no pre-mine or funding, but a lot of the other coins, there are thousands of them now. But are they legitimate? Are they securities? And obviously for consumer protection, whether people are going to be scammed into making investments in something they shouldn't. So there's a lot of scrutiny over that in terms of the SEC.
16:31 - 17:17
Mm-Hmm. I mean, they're looking carefully at whether to introduce now an ETF. A number of countries have got their own ETF, so the SEC is looking at a number of them in the next week or so, which are looking at futures ETFs, and they may opine upon that. But one of the biggest areas is in the infrastructure bill, where they're looking very carefully at tax collection to fund the the infrastructure expenditure. So they're looking very carefully at transparency and making sure people do pay their due levels of tax. But bitcoin actually is pretty heavily regulated. All the exchanges where you buy on Coinbase or Kraken, they will have to report to the HMRC or to the IRS of all the transactions that flow through it. So it does capture an awful lot of that process already.
17:17 - 18:11
Right. So, you know, there is a tightening up, but I think there's recognition that you can't ban bitcoin because you can't buy mass and cryptography and it's operating in its own network. All you can do is regulate the on and off ramps, IEU and how you invest your dollars. And you know, the fiat system is controlled by the government or various governments. So that is how they can create a pinch point. But the actual mining and the blocks being issued every 10 minutes will not change, and no government can ban that because of the decentralization. There are 10,000 nodes across the world, which support and monitor the network. You've got the miners as well, which is distributed across the world. So it's something very, very difficult to actually stop now. It is a bit like a mycelium network, i.e., a mushroom that is, you know, forming on the internet. And it's got its own momentum, which I think is unstoppable.
18:11 - 18:58
So let's bring it back to the top as we wrap up here What I've always found interesting, and what I really appreciate about today is, you know, these conversations sort of take on a life of their own. And you know, I talked to a lot of investors who are very focused on sustainability and responsible investing and having a positive impact. And I've noticed historically there's actually quite a bit of overlap with those investors and investors who are very interested in cryptocurrencies, bitcoin and so on. So maybe just to wrap up, you know, if there's someone out there who's thinking about responsible investing and sustainability, but then also trying to think about how cryptos may fit as a part of that, what is sort of the three things you'd want them to know as they continue to investigate this issue?
18:58 - 19:47
Well, I think it is one of the world's most disruptive innovations in finance, and it offers an alternative route for the unbanked in order to deposit and receive their wages across the world. You don't have to seek permission, and it immediately protects you from oppression. Also, it's a way of securing your individual property rights on a decentralized network that can't be brought down. So it is your property. You have space on the blockchain, which is... cannot be taken away. It's permissionless and censorship resistant. And I think that it drives economic empowerment. As I said, the bigger issue is being able to send remittances across the world, and it protects individuals from the ravages of inflation or currency debasement where you've seen people's wealth destroyed.
19:47 - 20:43
I think also the concerns about energy are very misplaced. You know, the energy efficiency is rapidly improving and movement to renewable energy. People will say, Well, you why should use energy for a Bitcoin network? Well, it's securing the world's most distributed database of information, which could overtake the banking network, and it's securing more and more value, and as I said, a lot of the miners now are actually helping to support the progress of renewable energy, and it means that the renewable energy operators in solar, gas-fluid, gas-hydro are able to build out plants and see an immediate revenue stream through mining Bitcoin, which they would otherwise not have. And it really protects the unbanked against inflation. That's a very democratic process. No one controls it, and you can get a stake on it by just downloading a wallet and receiving a few satoshis, as they call it.
20:44 - 21:19
Well, this is clearly a rapidly evolving area, and so perhaps we'll have Will back on the podcast in the future to give us an update on whether or not the environmental impact of crypto assets and some of the financial inclusion benefits of crypto assets play out over time as the ownership of these assets become more and more mainstream. We also will include a link to the blog that prompted the discussion that led to this podcast with Will in the description for the episode. This has been On Purpose. Thanks for joining us and remember, we all have values we hold dear.
21:19 - 21:32
Now you can ensure your investments reflect them. You can reach me on LinkedIn. If you've enjoyed the podcast, please rate us on Apple Podcasts, Spotify, or your podcast service of choice. And be sure to subscribe. Thanks again.
- Travis Allen
- Senior Investment Strategist, National Managing Director—Wealth and Investment Strategies Group