Since then, bitcoin fell to a new cycle low of $42,000, and is down 32% from its record high. The cryptocurrency did stage a brief bounce after Musk clarified that Tesla had not sold its more than $1 billion bitcoin position it bought in January.
But Ark Invest believes bitcoin can accelerate a green-energy revolution and become “a net positive for the environment,” the note said.
Bitcoin mining “could impact the amount of renewable energy provisioned to the grid by transforming intermittent power resources into baseload generation by way of energy storage… renewables would be able to satisfy only 40% of the grid’s needs in the absence of Bitcoin mining but 99% with the commercial ‘subsidies’ associated with Bitcoin mining,” Elmandjra explained.
When Elon Musk’s Tesla announced it had bought $1.5 billion of bitcoin and intended to start accepting it as payment in February, the cryptocurrency shot up and speculation abounded that other companies would soon follow suit.
But Musk stunned cryptocurrency fans on Wednesday when he announced that Tesla would stop accepting bitcoin due to fears that its “insane” energy use is hurting the planet. Bitcoin tumbled as much as 15% on Wednesday before recovering somewhat and was around 22% below its record high on Friday.
The idea that big companies – from Jack Dorsey’s Square to Wall Street banks – are buying in or offering crypto services to clients has been a huge driver of the bitcoin boom, adding legitimacy and capital to the market.
But after the most famous crypto enthusiast criticized bitcoin’s energy use, the question is, will companies continue to adopt bitcoin?
Bitcoin clashes with the ESG moment
A key problem for investors attracted by bitcoin’s stellar returns is that the cryptocurrency moment has come at a time when environmental, social and governance (ESG) investing is center stage.
Yet, bitcoin uses more energy than Sweden each year, with vast amounts of computing power required to solve complex puzzles to secure the network and create new coins. Bitcoin’s defenders say it increasingly uses renewable energy but a Bank of America report estimated that 72% of “mining” is done in China, where coal power dominates.
“Over the long term, it is difficult to see how this is consistent with a transition to a low carbon economy,” said David Sneyd, vice president in BMO Global Asset Management’s responsible investment team.
“We consider bitcoin, and other cryptocurrencies, to be a net negative from an ESG standpoint. As it currently stands, the positive potential of bitcoin remains unproven, but the negatives are very real and present.”
None of this was a secret before Musk’s bombshell tweet. But the backing of Tesla – the most famous electric car company in the world – undoubtedly made bitcoin enthusiasts feel more secure about the environmental impact of the digital asset.
On-the-fence companies may think twice
Edward Moya, senior market analyst at currency platform Oanda, told Insider: “A large part of Wall Street has embraced the ESG movement and while Musk didn’t reveal anything new, he brought bitcoin’s CO2 problem center stage.”
Moya said: “Tesla was the first domino that was supposed to unleash a steady wave of fresh interest across corporate America.” But Musk’s move could now “have a big impact on companies that were on the fence about accepting bitcoin as a form of payment or even putting on their balance sheets,” he added.
There are some signs that other advocates are cooling on the digital asset, with Square telling Financial News it had no plans to purchase more bitcoin. The fintech company, founded by Twitter chief executive Jack Dorsey, has been one of bitcoin’s biggest supporters and corporate buyers.
For some, companies buying bitcoin to hold on their balance sheets was always a bad idea, which was never likely to be copied by many big players.
Jerry Klein, managing director of Treasury Partners in New York, told Insider: “We don’t believe there ever was a case for adding bitcoin to corporate balance sheets.
“The vast majority of public companies are focused on cash preservation and don’t want to hold volatile assets. Most treasurers and CFOs see only downsides in taking risk with corporate cash.”
Die-hard bitcoin fans look set to keep buying
However, Oanda’s Moya said that die-hard companies that have bet big on bitcoin look unlikely to change their mind any time soon.
Michael Saylor, chief executive of technology company MicroStrategy, which has bought more than $2 billion of bitcoin, quickly questioned Musk’s move on Twitter. He also announced he had ploughed more money into the cryptocurrency.
David Wachsman, CEO and founder of communications firm Wachsman, told Insider that it is important to recognize that Musk himself has said he remains committed to cryptocurrencies.
“Lost in the hyperbole of the headlines is Tesla’s decision to continue to hold bitcoin on its balance sheet,” Wachsman said.
“This demonstrates its long-term commitment to cryptocurrencies as a technology, and is a pertinent reminder to other corporations of the risk of being phased out of the market without moving on digital currencies.”
Yet in the meantime, it appears Musk’s criticisms have focused investors’ minds on bitcoin’s problems, with numerous financial companies releasing reports into the environmental impact.
In a note to clients, analysts at Swiss bank UBS wrote: “The prospect of large gains may tempt investors, but we think speculation in crypto is a gamble, not an investment.”
Environmental problems, a lack of real uses, and competition from other cryptocurrencies such as ether mean it’s too early to see bitcoin as digital gold, Goldman Sachs has said.
Many crypto enthusiasts argue the world’s biggest cryptocurrency is a store of value that can be used as a hedge against inflation and a safe haven at times of stress, like gold.
But Goldman’s analysts, led by Jeffrey Currie, said in a note on Wednesday that bitcoin’s position as a defensive asset is far from assured.
They noted bitcoin has recently stalled at a time when a renewed spike in coronavirus cases around the world has led investors to seek defensive holdings.
One problem bitcoin faces is that it struggles in the eyes of investors due to the huge amount of energy used in the digital mining process, Goldman said. Research from Cambridge University has shown that it uses more energy each year as Argentina.
Many of bitcoin’s supporters dismiss concerns about its energy use, arguing that mining increasingly uses renewable energy.
Goldman’s analysts also flagged the fact that bitcoin has given ground to other cryptocurrencies such as ether and altcoins. They said this competition adds to the risks around holding bitcoin.
The bank also said bitcoin’s lack of use cases dented its appeal as a defensive asset. “Traditional long-term stores of value such as gold, art, diamonds, wine and collectibles all have value and use beyond being stores of value,” the analysts said.
“Real use is important because it smooths the volatility of the price, as real demand adjusts to absorb swings in investment demand. It also means that the asset is unlikely to go to zero.”
Bitcoin’s lack of real uses and its weak environmental scoring “makes it vulnerable to losing store-of-value demand to another, better-designed cryptocurrency,” they said.
“Therefore, we think it is too early for bitcoin to compete with gold for safe-haven demand and the two can coexist.”
The conversation around bitcoin’s environmental threat seems to be escalating as more people call out its impact on the climate.
Chris Larsen, Ripple’s co-founder, has suggested bitcoin should surrender its core proof-of-work (PoW) technology that is used in the mining process. He said it should instead use other methods such as proof-of-stake (PoS), federated consensus, or another technology that is yet to be developed.
PoW is an algorithm in the blockchain technology used to confirm bitcoin transactions and produce new blocks on the chain. It is an energy-intensive process, and even a few transactions on the network can have as much of a carbon footprint as driving a gas-powered sedan for 1,000 kilometers.
Bitcoin running on the PoW algorithm has led it to consume an average of 113.8 terawatts per hour, roughly equivalent to energy consumed by 12 million US homes, and release an estimated 63 million tons of CO2 annually, Larsen said in a blog post this week.
The PoS network, that Ethereum 2.0 runs on, is more energy-efficient as it uses less computing power to secure the blockchain. Larsen thinks Binance Coin and Ethereum, which both operate on PoS, should be commended for their efforts on sustainability.
“I know this is a bold proposal, but it is worth a serious discussion given what the world looks like today (in comparison to when Bitcoin was launched in 2009),” Larsen said. “While there are passionate debates about PoW versus other validation methods, we now have almost a decade of data to review.”
Ripple’s XRP has been using federated consensus, which allows multiple entities to take charge of the network, for nine years. Larsen said that is indicative of a carbon-neutral network, equivalent to the energy consumption of only 50 US homes per year.
“Today, non-PoW-based coins (including Ethereum’s anticipated switch) make up 43% of all cryptocurrencies by market cap, and the majority of new cryptocurrencies introduced today choose to eschew PoW. It’s clear which way the trend is moving.”
“I would argue that such a change is critically important for Bitcoin to remain the world’s dominant cryptocurrency.”
Larsen warned that while bitcoin gains institutional and retail prominence, many of its advocates are turning a blind eye or attempt to greenwash its problem.
He also said Tesla’s $1.5 billion investment in bitcoin goes against its purpose of being an electric-vehicle maker. The purchase wiped out the automaker’s entire annual C02 savings, he said.
“As companies begin to understand this troubling connection, they would rightfully have concerns investing. Bitcoin advocates should see this as a significant threat.”
Bitcoin’s energy consumption has jumped 80% since the beginning of 2020 amid a meteoric rise for the digital currency.
According to Cambridge’s Centre for Alternative Finance, the cryptocurrency’s estimated annualized electricity consumption at the beginning of 2020 was 71.07 terawatt-hours. On March 11 of this year, that figure hit 128 terawatt-hours.
For reference, in all of 2019, Australia’s main electric grid used only 192 terawatt-hours. And the entire country of Argentina uses just 125 terawatt-hours annually.
Bitcoin now represents 0.59% of total worldwide energy consumption, according to Cambridge, and if you were to rank every country in terms of their total energy consumption including bitcoin, the digital asset would be the 29th largest consumer of power on the planet.
Bitcoin’s excessive energy use and climate change impact have been under scrutiny from all sides lately. Experts have repeatedly warned about the “staggering” amount of energy required to mine the digital currency.
“Bitcoin uses more electricity per transaction than any other method known to mankind,” Gates said in a Clubhouse interview with New York Times reporter and CNBC co-anchor Andrew Ross. “It’s not a great climate thing.”
On the other hand, some experts say bitcoin’s energy use isn’t an issue as long as the energy comes from green sources, and it appears there has been a transition to using more green energy for digital currencies.