Forex in this article
Cryptocurrencies are not in themselves considered sustainable
ESG criteria partially met
Investors need to make priority decisions
Sustainable investment is playing an increasingly important role for investors. Anyone who invests responsibly and applies ethical, social and ecological criteria, but at the same time wants to generate income, can not avoid looking at the cryptocurrency market. Trading cryptocurrencies such as Bitcoin, Ethereum & Co. is worth a look, especially from a return point of view. As cryptocurrencies continue to become mainstream, the market continues to be worth trillions despite massive recent losses. The return potential in the sector remains high – but so does the risk in light of the high volatility.
Sustainability criteria under the magnifying glass
Sustainable investments are characterized by consideration of specific criteria. In this context, the concept of “ESG” has been established, which combines criteria from the segments environment (environment), social (social) and responsible corporate governance (management). Investments that score in these three categories are generally considered sustainable investments. But how much ESG is there in cryptocurrencies like Bitcoin?
Environment: Cryptocurrencies and the environmental aspect
Looking more closely at cryptocurrencies based on the consequences for the environment, the conclusion for cyber currencies is at least mixed to negative. There is a great demand for electricity for generating cryptocurrencies and for depots. The blockchain requires a worldwide computer network to perform crypto transactions, but also to extract Bitcoin and Co. The high computing power results in a massive energy consumption. In addition, electricity costs, especially in countries where excessive cryptocurrency mining is practiced, are relatively cheaper. but renewable energy is only rarely a problem when electricity is produced.
How high the electricity consumption in the crypto sector actually is is assessed differently by experts. The estimates are very different: While the University of Cambridge estimates the annual energy consumption for sharpening cryptocurrencies at 143.67 TWH in its “Cambridge Bitcoin Electricity Consumption Index”, “Digiconomist” calculates with 97.26 TWh, Dan Held from Ark Investment, in meanwhile, comes to a much smaller number with an estimated 50.8 TWH. Estimates of energy consumption in blockchain transactions also vary widely. However, experts agree that the energy requirements for cryptocurrencies are high, especially as the energy mix is difficult to determine. Cryptocurrencies, crypto-transactions and storage of cyber-currencies as well as all work related to blockchain are energy-intensive and therefore hardly compatible with the “E” of the ESG criteria.
However, it should also be pointed out that Fiat currencies also leave a significant carbon footprint. Currency systems based on paper money are not only environmentally polluting in connection with the production of currency, transport and custody are also in conflict with ESG criteria.
Social Criteria – Partial Success for Bitcoin & Co.
Social and societal aspects are also a criterion for sustainable investment. When looking at the issue of social justice, cryptocurrencies can score – depending on how you look at it. The independence of banks and governments in particular makes cyber currencies a tool for participation. This was also confirmed some time ago by Charlene Fadirepo, a former chief audit officer of the Federal Reserve Board of Governors, in an interview with Yahoo Finance, in which she specifically quoted the group of black Americans for whom bitcoin is a “tool for social justice “. Cybercoin would create a level playing field, especially for people who would be disadvantaged by traditional banks. “If you think of black Americans, we think bitcoin is [uns] makes it possible to build generational riches. And not just black Americans, Hispanics, LGBT communities, and Native Americans. It enables societies to build wealth in societies that have been excluded from the discriminatory banking system we have today. ”
Regardless of this, critics of cryptocurrencies now claim that the social criterion does not matter at Bitcoin & Co. They also point out that crime in the crypto segment is high – due to the widespread anonymity, which advocates in turn see as positive. That there is almost no identity control when, for example, opening a purse is a paradise for criminals. The blockchain analysis company Chainalysis recently gave the crypto market a devastating verdict in its “Crypto Crime Report 2022”: Crime in the crypto market has reached a new record high. In 2021, a total of about $ 14 billion in cryptocurrencies were transferred to illegal addresses. The amount stolen through fraud – such as so-called “rug pulls”, where developers collect funds from their victims for alleged projects via tokens and then disappear without a trace – increased by 82 percent compared to the previous year to 7.8 billion US dollars, while crypto thefts – for example. through successful hacks – increased by as much as 516 percent to $ 3.2 billion. The trend towards more cryptocurrencies continues this year.
Governance – Also a problem with BTC and ETH
Governance structures that are common in companies are only partially found in the crypto segment. Against this background, an evaluation of corporate governance and corporate culture from an ethical point of view must be carried out differently than in companies, because the decentralization of cryptocurrencies makes it difficult to use typical corporate structures.
Nevertheless, ethical criteria can be developed that will make it possible to assess whether the “G” in the ESG can be used in the crypto market. The first thing to mention here is transparency, which also plays a role in traditional companies. While the management level of, for example, (listed) companies is forced to act transparently and make potentially market-moving news available to everyone as quickly as possible, there are of course no two opinions about the transparency of the processes in the crypto market. The source code is publicly available, transactions on the blockchain can be tracked and cannot be changed subsequently. Against this background, the world’s largest cryptocurrency Bitcoin is not anonymous, but pseudonymous: Transactions can be assigned to addresses, associated parameters are publicly visible.
In addition, blockchain transactions are open to all, the network provides equal opportunities. This is so often not the case in classic corporate structures that the complete neutrality of human-led projects, groups or companies is in doubt.
If you set the right standards, the crypto market can definitely score points in terms of governance.
How much ESG is actually in crypto?
A final conclusion on how sustainable crypto-investment actually is cannot be made clear when looking at the ESG criteria. Those who value the environmental aspect particularly highly are unlikely to classify Bitcoin & Co. as a sustainable investment, while those who value social participation and transparency are likely to assess the situation differently.
Above-average returns can certainly be achieved with crypto investments – but so can above-average losses. The fluctuations in the digital currency market are high, one of the reasons why ESG experts do not regard cryptocurrencies as valuable investment targets. In principle, cyber currency investments are not a classic ESG investment, but sustainable crypto investments do not yet represent a contradiction. In fact, investors need to weigh problem areas such as money laundering, high electricity consumption and shadow banks against transparency and social inclusion.
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