Green investments are assets like bonds that pay for projects with positive environmental and social outcomes. Green bonds, for example, contribute to cuts in greenhouse gas emissions, an increase of renewable-energy capacity and uptake in clean transport infrastructures.

Crypto investments, on the other hand, are widely seen as environmentally unfriendly, mainly because of crypto mining and the huge energy it demands. Mining in the context of crypto refers to a mechanism called “proof of work” (POW), where crypto “miners” use specialized computers to solve complex mathematical equations to secure transactions and create new coins. This is where the energy use comes in.

Agencies and organizations like the International Energy Agency and the United Nations have raised concerns about the effects of crypto mining – particularly Bitcoin, the best-known crypto asset.

The environmental footprint of crypto

The United Nations University Institute for Water, Environment and Health estimated that in 2020/2021, Bitcoin networks had significant carbon, water and land footprints. Bitcoin’s carbon footprint was equivalent to burning 38 billion tonnes of coal, while its water footprint (mainly used for cooling systems) would have met the domestic water needs of more than 300 million people in sub-Saharan Africa.

The Cambridge Blockchain Network Sustainability Index puts the electricity consumption of Bitcoin networks above those of several developed countries, including Norway and Sweden. For investors who are serious about achieving ESG goals, this aspect of crypto would likely be a deal-breaker.

It is also made difficult by the lack of regulations around crypto activities. After years of being on the fringes of financial markets and being considered a “get rich quick” venture, crypto investments are becoming mainstream. But there is still little regulation to protect investors and ensure that participants adopt practices that are in line with ESG values.

Skeptics point out the major issues plaguing these markets, including the use of cryptocurrencies and platforms for money-laundering, scamming and price manipulation.

So it is certainly hard to make a green case for crypto. But at the same time, it would be misleading to look only at one side of the coin. The fact is that crypto has a challenging but reachable path to being widely accepted as green.

Decarbonizing the crypto industry

First and foremost, the industry itself has recognized the need to change practices and processes to become more sustainable. In 2021, a significant number of players in the crypto industry signed the Crypto Climate Accord (CCA) with the long-term target of decarbonizing the global crypto industry by 2040.

The CCA set two interim objectives. The first was the development of standards and technologies to have 100% renewably powered blockchains as soon as 2025. The second aim states that signatories should achieve net-zero emissions from electricity consumption by 2030.

Recent developments in technology suggest the industry has started putting plans into action, with the appearance of sustainable tools and infrastructures.

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Several companies such as Mara and Argo are working on technologies like energy-efficient immersion cooling systems that significantly reduce the energy consumption required for mining.

These companies are also developing systems that can recycle heat produced by digital assets and from data centres and redirect it to provide energy to communities. The implementation of these technologies is facilitated by the relative mobility of crypto miners and the opportunities that some governments and regions offer to them.

In addition, the crypto industry has seen the emergence of self-proclaimed environmentally friendly cryptocurrencies, such as Cardano public blockchain and Powerledger. These currencies use a less energy-intensive mechanism called “proof-of-stake” (POS) rather than POW.

Unlike POW, POS miners must stake their holdings (the amount of cryptocurrency) when validating and verifying transactions and records. So if a miner tries to falsify records, they could potentially lose their stake. The process removes the need for the complex computer calculations and so cuts the energy use dramatically. In fact, in 2022, the cryptocurrency Ethereum transitioned from POW to POS, reducing its energy consumption by nearly 100%.

The path toward green crypto is being eased by institutions like the Financial Stability Board, which is taking steps to provide frameworks for understanding, compliance and achievements of ESG goals and values.

Together, these elements could open the door to a future where conscious investors can take a chance on cryptocurrencies.

Jean Bessala is a lecturer in finance at the Salford Business School at the University of Salford.

This story originally appeared in The Conversation. It has been edited to conform with Corporate Knights style. Read the original article here. 

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Twelve years later, the world is coming to grips with the eco-disaster that is Bitcoin. The currency backstops an alternative global payment system, with the value of a single Bitcoin hitting $79,000 in mid-April, up from $10,000 in January 2020. But Bitcoins are intangible units of value created by networks of supercomputers, and the environmental impact of running these machines equals the carbon footprint of a mid-range industrialized country.

Many of these server farms are located in colder countries to save energy, and some, as in Iceland, Norway and Quebec, use renewable thermal and hydro power. But according to the University of Cambridge Centre for Alternative Finance (CCAF), two-thirds of Bitcoin power is generated from fossil fuels. About 75% of Bitcoin mining occurs in China, which derives 65% of its electricity from coal. (In May, ironically, China banned the country’s payment companies from handling Bitcoin transactions; its central bank dismissed virtual currency as “not a real currency.”)

Real or not, Bitcoin eats electricity. This became clear in mid-April when a coal mine flooded in Xinjiang territory, in China’s remote northwest. When the mine closed for safety inspections, the disruption to regional power plants briefly shut down a full third of Bitcoin’s global computing power. Suddenly, Bitcoin’s yearlong price run-up came to an end.

The CCAF estimates Bitcoin production will consume about 130 terawatt hours (TWh) of electricity this year – about the same as Argentina, the Netherlands or the province of Ontario. That’s a big jump from 2019, when the CCAF calculated that Bitcoin production burned 45 TWh.

And demand is expected to grow. As more miners set their caps for Bitcoin, the algorithms required to earn a Bitcoin become more complex, requiring ever more computing power.

The backlash has begun. In a bid to reduce its carbon emissions, China’s Inner Mongolia region is trying to shut down unauthorized Bitcoin miners. In May, Tesla founder Elon Musk tweeted that while he supports the notion of cryptocurrency, Bitcoin’s “energy usage trend over past [sic] few months is insane.” He said Tesla would stop accepting Bitcoin payments until the industry “transitions to more sustainable energy.” Analysts claimed Musk’s decision would send a strong signal to other firms.

Some Bitcoin miners are fighting back. They’ve signed a “Crypto Climate Accord” that proposes to decarbonize the crypto industry by making it 100% renewably powered by 2025. But that may not be enough to prevent Bitcoin from becoming a stranded asset – like existing coal mines and oil fields that society can no longer afford to operate.

Ben Ashby, a partner with London-based Good Governance Capital, says Bitcoin’s dependence on computer processing makes it a fossil itself. In addition, he says, Bitcoin’s decentralized nature defies ESG investors’ attempts to conduct environmental audits. Ashby believes investors will increasingly shun Bitcoin in favour of more sustainable solutions: “There is no intrinsic reason why this mining activity has to happen.”

With governments developing their own digital currencies, Ashby says Bitcoin’s fate may be to go down in history with MySpace and Betamax – as experiments that seemed like a good idea at the time.

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