Bitcoin v ESG: Fund manager Chris Clothier warns against BTC

Rick Steves

“There are also persistent rumors that the price of Bitcoin is being manipulated by bad actors. Whether true or not, the lack of regulatory oversight makes manipulation more probable than in mainstream markets”.

Talk of Bitcoin’s detrimental role on the environment has been around for years and it has served the interests of competitors within the crypto space, such as Ripple and its rhetoric, and eventually bearish investors.

The top cryptocurrency by market cap, however, is not only affecting the environment but the three principles of ESG values (Environment, Social, and Governance), according to CG Asset Management fund manager Chris Clothier.

At the current pace, Bitcoin is estimated to consume as much electricity as the Netherlands and has a carbon footprint equal to the entire country of New Zealand as miners race to complete the proof of work against other miners. The winner of each 10-minute race is awarded new coins.

The rising price of Bitcoin is incentivizing more investment in resources to earn the rewards. These resources, comprised of air-conditioned server farms, are mostly based in China and rely on coal power, he said.

In fact, a coal mine in Xinjiang flooded and shut down over the weekend of April 17–18. The blackout halted no less than one-third of all of Bitcoin’s global computing power.

All in all, Bitcoin is much less efficient than the networks it aims to replace, with the Bitcoin network using as much energy for one transaction as 500,000 transactions on Visa.

In regard to “Social”, Bitcoin’s negative social effects can be seen in the anonymity it offers to drug traffickers, money launderers, child pornographers, extortionists, and terrorists. Criminals are provided with a ‘safe space’ to conduct their transactions, away from the eyes of the law and regulators.

Mr. Clothier also points to governance issues as a result of being a decentralized network incapable of being debased by government fiat or coopted by illiberal diktat.

“With no depositary, central register, or formal governance arrangements, there is no one that an investor can turn to when their bitcoin is lost, stolen or their password forgotten.

“There are also persistent rumors that the price of Bitcoin is being manipulated by bad actors. Whether true or not, the lack of regulatory oversight makes manipulation more probable than in mainstream markets”, Mr. Clothier added.

“Anonymity in financial markets has been in decline for decades. Libertarian ideas have been ranged against the legislative and coercive powers of the state. It has not been a fair fight; states have won and society at large has accepted the outcome. The benefits of financial anonymity to law-abiding individuals are modest, yet the costs to society from criminal exploitation of anonymity are great and take the form of tax evasion, money laundering, and financing of terrorism.”

Mr. Clothier concluded that Bitcoin is capable of reform but its decentralized nature makes change cumbersome and, for the time being, investors with any consideration for ESG principles should avoid it.

In January, the fund manager published a special report, “We Need to Talk About Bitcoin”, which addresses the many issues he considers to be problematic.

In reply to the report, Brushify.io’s CEO Joe Garth argued on LinkedIn that “the sustainability argument is incredibly short-sighted”.

“Bitcoin uses a fraction of the energy that the conventional banking system requires. Go to New York and look at those skyscrapers lit up like Christmas trees, filled with computers. Think about the employees of those banks and all the energy they’re using pushing numbers around on spreadsheets manually. the transportation of those employees, the food for those employees.. the costs of traditional banking go on and on.

“Covid got those offices closed, notice how all the restaurants and small businesses supporting them went bankrupt? Those also add to the power draw. It’s vast, probably incalculable.”

“Banking has Millions of workers that are no longer needed. Why? Crypto will automate away the traditional banking and financial system and use less power and be more efficient. Just like the uber drivers will get replaced by automation, so will the bankers, brokers, and clearing houses”, he said.

Mr. Clothier replied: “First, I would be very surprised if crypto makes many financial services jobs redundant […] But if you are right and those millions of workers aren’t needed, presumably they will find other useful employment (like rendering beautiful virtual worlds!) and those activities will involve sitting in front of lots of energy-hungry computers.

“I think the bigger point is that, purely in network transaction terms, 1 bitcoin transaction uses around 500,000x as much energy as one transaction on the Visa network (per statista)”.

Mr. Garth then said “Bitcoin may be slow and expensive, but Crypto, in general, will not stay that way. Meanwhile, Fiat currency and traditional banking are in dire condition. The gold standard is gone, and value rests in a promise from governments that have lost the confidence of the people. That’s why the shift towards crypto, precious metals, is gradually taking place.”

The discussion over the possibility or not of Bitcoin being legislated out of the hands of holders remains open. Historical precedent with Gold in the 1930s shows that governments could go that route.

Crypto enthusiasts would still argue that, when trading Bitcoin off-exchange and off registered wallets, all bets are off. The Bitcoin network is designed to blur the correspondence between transactions and IP addresses, which anonymizes transactions and holders.

Only serious forensic efforts would be able to identify Bitcoin movers. But a world of mass adoption could probably deem that impossible.

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