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TL;DR:

• Recent events have re-ignited the ongoing debate over the impact of bitcoin mining on the environment. This has brought to light the need for a more factual analysis of the energy use of Bitcoin’s Proof-of-Work consensus mechanism.  

• Although the investment case for bitcoin has strengthened in recent years, some institutional investors consider bitcoin mining a deal-breaker to allocate to crypto.

• However, bitcoin mining is currently emerging as a powerful environmental tool to mitigate greenhouse gas emissions, monetize intermittent renewable sources, and use excess energy in electrical grids.

• These novel solutions have recently been shown to be an important share of updated estimates for the energy mix of bitcoin mining, with sustainable sources currently appearing as the majority of the total energy used.

• This potential, which is already being officially acknowledged by governments, is steadily transmuting bitcoin into a full-fledged environmental play.

 

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Greenpeace recently commissioned a piece of art called “The Skull of Satoshi” that was aimed at criticizing the energy use of Bitcoin’s Proof-of-Work (PoW) consensus mechanism. After the artwork was subsequently embraced by the crypto community, the artist, Benjamin Von Wong, posted a Twitter thread admitting that his narrow view of Bitcoin’s environmental impact was wrong, and that he believes The Skull of Satoshi represents that “Bitcoin has the potential to be more environmentally friendly.”

This event, as well as recent media attention that does not present a full and fair analysis of mining, is a perfect example of why a more factual examination of Bitcoin’s energy profile is needed. As Von Wong recognizes, bitcoin (BTC) mining is not “a simple black-and-white issue.” We agree and have worked hard to help our investors understand both the importance of bitcoin mining and its shifting energy profile, something that is becoming increasingly important as investors evaluate how crypto assets impact the “E” in ESG. 

To that end, we have put together this report to identify some of the most important developments regarding bitcoin mining as well as considerations for investors as they evaluate the impact of BTC on the environment.   

 

Bitcoin’s improving investment case

Bitcoin’s investment case has been strengthening on several fronts in recent years, particularly due to the increased interest of institutional investors for the flagship digital asset. And while historical data suggests that the risk-adjusted returns of a portfolio can be significantly aided by a small BTC allocation, a share of institutional investors still considers mining an impediment to including BTC into their investment strategies, leaning on the overall perception that the Bitcoin security model is in conflict with ESG principles. 

Bitcoin advocates have historically argued that, although BTC mining does use significant amounts of energy, the social and economic benefits of Bitcoin as a censorship-resistant network, and of BTC as an asset that can’t be confiscated or diluted by a central authority, far exceed any negative environmental impact from mining. Additionally, Bitcoin’s PoW consensus is carried out by tens of thousands of independently run computers, which ensures that the network parameters and BTC’s monetary policy are kept unchanged over time. This important governance structure helps verify that miners have done the work to include new blocks on the Bitcoin ledger. 

These characteristics of Bitcoin generally count as positive factors for both the “S” and “G,” but are often perceived as a negative factor for the “E.” The combination of these three, however, arguably provide a net positive ESG score for BTC. But the common perception that Bitcoin’s “E” factor is a negative, which prevails even among strong Bitcoin proponents, is steadily starting to change as real-world initiatives suggest that BTC mining might soon become a full-fledged ESG play.

 

Mining’s green evolution

 

There are two primary drivers that are changing the environmental impact of BTC mining. The first is that mining is being used to help curb greenhouse emissions and the second is its use as a stabilizer for the energy grid. 

 

1. BTC mining as a tool to mitigate greenhouse gas emissions

BTC mining is emerging as a tool to mitigate greenhouse gas (GHG) emissions from hydrocarbon extraction. According to the most recent report on flaring emissions by the International Energy Alliance (IEA), in 2021, global gas flaring—the process by which oil and gas companies combust flammable gas which can’t be transported to other locations due to inexistent pipelines—burned an equivalent to the total volume of natural gas imported by Germany, France, and the Netherlands, contributing to a direct release of 270 Mt of carbon dioxide (CO2) and nearly 8 Mt of methane (equivalent to ~240 Mt of CO2). By comparison, the Cambridge Bitcoin Electricity Consumption Index (CBECI) estimates that the total annual carbon footprint of Bitcoin is 62 Mt CO2 (~12% of natural gas flaring in 2021). 

Recently, companies like Crusoe started offering a technology that transforms gas that would otherwise be flared into electricity. However, like the original gas, this electricity would have to be transported from the production site to consumption locations, which poses similar challenges as building gas pipelines. That’s where BTC mining comes in handy. Mining facilities (such as BTC mining containers) can be settled onsite and use the electricity generated to create a product—BTC—that trades in a global market and whose transportation cost is close to zero, something which can’t be said of any other commodity or good. Furthermore, the methane in excess gas can be burned more effectively, creating a real carbon credit that mitigates ~63% of equivalent CO2 emissions, while aiding the IEA goal of reducing flaring volumes by 90% until 2030. This technology is currently being used by companies like ExxonMobil and ConocoPhillips, and the whole opportunity is starting to be acknowledged by governments, with the Office of Science and Technology Policy of the White House explicitly stating in a September 2022 report that “crypto-asset mining operations that capture vented methane to produce electricity can yield positive results for the climate.”

 

2. BTC mining as an off-grid energy stabilizer

Another example of BTC mining as a catalyst for a greener future is the utilization of off-grid energy excesses from sustainable sources, alongside the potential of mining as an electrical grid stabilization tool. In particular, despite wind and solar technologies having gained efficiency and grown in adoption over the past decade, their inherent intermittency makes them less competitive in terms of costs when compared to fossil fuels or other sustainable sources (such as hydro and nuclear). While batteries theoretically could solve the issue of energy storage, these come with their own set of negative social impacts, such as unhealthy working conditions for cobalt miners in poor African countries, and environmental challenges related to the proper disposal and recycling of toxic waste. BTC mining surges as a convenient solution, with miners becoming the buyer of last resort for intermittent energy sources by consuming the excess power when sunlight and wind are abundant, but demand is low, and switching operations off when peak demand arrives. As is already the case for some US states, installing industrial mining operations where excess energy is available can also lead to tax advantages on electricity expenses, equipment costs, repairs and rented space, which further incentivizes mining facilities to turn off operations during extreme weather conditions.

 

 

Now, while at first glance these emerging solutions look attractive from an environmental standpoint, one may argue that the use of BTC mining as either a GHG emission mitigator or a grid stabilization tool is still too incipient to count as a positive “E” score for BTC. Indeed, in a paper released in September 2022, researchers from the Cambridge Centre for Alternative Finance (CCAF) used the theoretical model powering the CBECI to evaluate the energy mix of BTC mining, finding that, as of January 2022, 37.6% of the energy came from sustainable sources (26.3% renewables and 11.3% nuclear), while 62.4% derived from fossil fuels. However, in that same paper, authors emphasize that some activities which might reduce net emissions are unaccounted for in the CBECI, including “the use of flare-gas, off-grid Bitcoin mining, waste heat recovery, or carbon offsets.” A more recent analysis by Daniel Batten, co-Founder at CH4-Capital—an investment fund focused on methane abatement technologies—has revisited these exact points and concluded that the CCAF paper underestimates the sustainable portion of the energy mix of BTC mining by 15%, implying that, as of January 2022, 52.6% of the total electricity used already came from sustainable sources, with 1% coming from flare-gas and 10.8% derived from renewable off-grid energy usage, much closer to the figure (58.9%) released by the Bitcoin Mining Council for Q4’22.

 

The bottom line

 

While there’s room for improvement in the estimates for the energy mix used by BTC mining, current data points suggest that the use of new sources of sustainable energy has been gaining traction in recent years. In other words, the opportunity to use mining as a de facto tool for a more environmentally responsible future is already playing out. New sustainable energy projects that would otherwise not be financially viable can become feasible, and a new source of real carbon credits may now be leveraged to meet the ambitious IEA goals of net-zero emissions by 2050. For investors, this means mining might no longer be perceived as a villain, but rather as an effective tool of environmental responsibility. The BTC mining genie is coming out of the bottle, and the “E” factor of BTC is increasingly leaning positive.

 

_{[1] ESG stands for environmental, social and corporate governance.}

_{[2] Mt CO2 stands for a megaton of CO2 (the conventional unit of measurement for GHG emissions), equal to the volume of one million spheres of CO2 with 32 ft (~10m) in diameter.}

_{[3] Methane is estimated to be 28 to 34 times more effective than CO2 at trapping heat in the atmosphere over a 100-year period.}

_{[4] A miner can have all their hashrate deployed at an extraction site in the Gulf of Mexico and have the BTC they mine directly sent to an address in Hong Kong with no transportation costs.}

_{[5] Intermittency means that an energy source is not constant, such as sunlight, which is only present during the day.}

 

 

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