From Venture Capital To Wall Street, A New Paradigm Emerges: BTC = ESG

What is bitcoin?

Its proponents offer no shortage of answers: peer-to-peer cash. Digital gold. A hedge against inflation. But only in the inner bowels of the bitcoin rabbit hole have mainstream financial institutions begun to discover its most compelling use case: bitcoin as an ESG asset.

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Could BTC = ESG? According to professional services firm KPMG, the answer is a resounding yes.

In a recently published report, KPMG makes the case that bitcoin can serve a number of ESG functions—from stabilizing power grids and driving investment in renewables to monetizing stranded energy and capturing methane. The paper coincides with new research from Cambridge University and Bloomberg Intelligence that reveals bitcoin’s environmental impact to be much smaller than previously thought. And it comes just weeks after BlackRock—the largest asset manager in the world and one of the leading proponents of ESG—announced that it had filed for a spot bitcoin ETF.

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BTC As ESG

In the ongoing debate over bitcoin’s energy consumption, enough ink has been spilled and paper printed to be its own environmental issue. But in 2023, the winds are changing. Not only do they propel the turbines that power bitcoin mining—they are beginning to shift in the cryptocurrency’s favor.

KPMG’s report challenges conventional wisdom on Wall Street with a provocative thesis. In the words of its authors, “Bitcoin appears to provide a number of benefits across an ESG framework.” These benefits include:

Creating New Markets For Renewable Energy

Bitcoin miners can tap into any energy source, anytime, anywhere in the world. And they are in constant search of low-cost energy, which they increasingly find in under-utilized renewable sources, such as hydro, wind, geothermal, and solar.

Because they are subject to the whims of nature, windmills, solar panels, and dams often create energy when nobody needs it. This is known as “stranded energy,” and without a buyer, it goes to waste. Bitcoin, however, creates a robust marketplace for this kind of energy. Because the Bitcoin network runs 24/7/365, it can make use of renewable energy at all hours of the day and during any season of the year. Bitcoin’s flexible demand load not only can increase revenue for green power providers but can also encourage further investment in clean energy.

Stabilizing Power Grids

Matching supply with demand is one of the most significant challenges facing power providers. Too much energy production can overwhelm the grid. But so can too much demand. This is where bitcoin comes in.

Bitcoin miners can act as an energy sponge, soaking up excess energy when needed to prevent it from overloading the grid. But they can just as easily shut off at a moment’s notice when demand grows too high, as bitcoin miners did during a heat wave in Texas last month. The ability of bitcoin miners to do everything—or nothing—all at once is a boon to power providers. But it can also benefit customers by mitigating demand spikes to help keep prices low.

Reducing Methane Emissions

Methane is a significant driver of climate change. According to the KPMG report, methane is 80 times more potent than carbon dioxide and is responsible for approximately 30% of global warming. To make matters worse, landfills act as methane mega factories, spewing toxic gas into the air as a byproduct of the decomposition process.

So what to do about all this methane? Believe it or not, bitcoin fixes this.

Companies are finding ways to capture vented methane on landfills and then turning that methane into electricity. They then use that electricity to mine bitcoin. This practice both reduces carbon emissions and monetizes stranded energy by taking toxic fumes and converting them into digital gold. If the process can be scaled, it could forever change the way landfills operate.

Other firms are following a similar model by converting flared gas into electricity to mine bitcoin. Like methane capture, this process harnesses energy that otherwise would have gone to waste. Consider that the potential energy of flared gas in the US and Canada could power the entire bitcoin blockchain, according to Harvard Business Review.

A New Look At Bitcoin’s Energy Consumption

Alongside the KPMG report, researchers at Cambridge University and Bloomberg Intelligence are taking a closer look at bitcoin’s energy consumption. And what they are finding also challenges past assumptions on bitcoin and its environmental impact.

Of note, the Cambridge Center for Alternative Finance updated its methodology for calculating bitcoin’s global energy usage to better reflect differences across crypto mining machines. This led to a significant revision in its estimate of bitcoin electricity consumption in 2021—down from 114.0 TWh to 89.0 TWh. In other words, Cambridge overstated bitcoin’s electricity consumption that year by 15.0 TWh. To put that number in context, 15.0 TWh is enough electricity to power 1.4 million American homes for an entire year, according to the US Energy Information Administration.

New data from Bloomberg Intelligence is also reshaping bitcoin’s reputation on Wall Street. While environmentalists have pilloried the cryptocurrency in years past, new research shows that more than 50% of bitcoin’s power mix now comes from renewables. In retrospect, China banning bitcoin was a blessing in disguise for the network. That’s because the United States—which leads the world in sustainable bitcoin mining—hoovered up a significant portion of Chinese mining rigs, introducing more renewables into bitcoin’s energy mix.

Bitcoin > Solar?

New data and use cases have rewritten the script on bitcoin and the environment. Some climate-tech investors even believe that bitcoin is not only simpatico with an ESG framework; it is superior to existing ESG technologies. Daniel Batten, the co-founder of environmental investment fund CH4 Capital, is one of them.

In an interview, Batten explained to me that all climate-tech inventions have a carbon footprint at their inception. Solar, for example, only paid off its carbon debt in the 1990s—40 years after it was first invented. Batten believes Bitcoin is an ideal ESG technology because it won’t take nearly as long for the network to begin contributing to the environment in a positive way.

“As a technologist I’m used to taking a long-term view when evaluating a technology’s ESG credentials,” said Batten. “It’s clear to me that bitcoin can pay off its climate debt much sooner than solar energy, and because of its ability to mitigate methane, can address more urgent challenges.”

Batten believes in allocating capital where it will have the greatest impact from an environmental perspective. And by that metric, bitcoin again beats solar. Per Batten, “Our calculations show that investing in bitcoin mining powered by vented landfill gas is 45 times more emission reducing than investing in solar infrastructure deployment per dollar invested.”

The Bigger Picture

The environmental case for bitcoin is just taking root. But expect it to blossom in the months to come.

Why? Because watering the seeds will be the likes of BlackRock, Fidelity, ARK Invest, and other asset managers that have filed for a spot bitcoin ETF.

An ETF approval is likely to drive billions of dollars in institutional investment toward the world’s leading cryptocurrency. Key to onboarding investors big and small into the digital asset economy will be education, which entails correcting outdated narratives on bitcoin and the environment. Recognizing bitcoin’s emerging use cases as an ESG technology is a good place to start.

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