finance

Bitcoin and banking’s differing energy narratives are a matter of perspective

Bitcoin mining’s climate impact has been heavily criticized, but the emissions of corporate cash and investments have often flown under the radar.

The Carbon Bankroll Report was released on May 17 as a collaboration among the Climate Safe Lending Network, The Outdoor Policy Outfit and Bank FWD. The collaboration made it possible to calculate the emissions generated due to a company’s cash and investments, such as cash, cash equivalents and marketable securities.

The report revealed that for several large companies, such as Alphabet, Meta, Microsoft and Salesforce, the cash and investments are their largest source of emissions.

The energy consumption of the flagship proof-of-work (PoW) blockchain network, Bitcoin, has been a matter of debate in which the network and its participants, especially miners, are criticized for contributing to an ecosystem that might be worsening climate change. However, recent findings have also brought the carbon impact of traditional investments under the radar.

Bitcoin is often vilified due to “imagery”

The Carbon Bankroll Report was drafted by James Vaccaro, executive director at the Climate Safe Lending Network, and Paul Moinester, executive director and founder of the Outdoor Policy Outfit. Regarding the impact of the report, Jamie Beck Alexander, director of Drawdown Labs, stated:

“Until now, the role that corporate banking practices play in fueling the climate crisis has been murky at its best. This landmark report shines a floodlight. The research and findings contained in this report offer companies a new, massively important opportunity to help shift our financial system away from fossil fuels and deforestation toward climate solutions on a global scale. Companies that are serious about their climate pledges will welcome this breakthrough and move urgently toward tapping this lever for systematic change.”

A few metrics that the report highlighted regarding the climatic impact of the banking industry include:

Since the signing of the Paris Agreement in 2015, 60 of the world’s largest commercial and investment banks have invested $4.6 trillion in the fossil fuel industry.
Banks such as Citi, Wells Fargo and Bank of America have invested $1.2 billion in said industry.
The largest banks and asset managers in the United States have been responsible for financing the equivalent of 1.968 billion tons of carbon dioxide. If the U.S. financial sector were a country, it would be the fifth-largest emitter in the world, just after Russia.
When compared to the direct operational emissions of global financial firms, the emissions generated through investing, lending and underwriting activities are 700 times higher.

Cointelegraph spoke with Cameron Collins, an investment analyst at Viridi Funds — a crypto investment fund manager — about the reasons behind the excessive vilification of the Bitcoin network. He said:

“It’s easy to picture a warehouse of high-performance computers sucking down power, but it’s not so easy to picture the downstream effects of cash in circulation financing carbon-intensive activities. More often than not, it’s this imagery that demonizes Bitcoin mining. In reality, the entire banking system uses more electricity in operations than that of the Bitcoin mining industry.”

In addition to the portrayed “imagery,” there have been various efforts to track the exact energy consumption of operating the Bitcoin network. One of the most widely accepted metrics for this complex variable is calculated by the Cambridge Center for Alternative Finance and is known as the Cambridge Bitcoin Electricity Consumption Index (CBECI).

At the time of writing, the index estimates that the annualized consumption of energy by the Bitcoin network is 117.71 terawatt-hours (TWh). The CBECI model uses various parameters such as network hash rate, miner fees, mining difficulty, mining equipment efficiency, electricity cost and power usage effectiveness to compute the annualized consumption for the network.

The growth in the number of participants and related activity on the Bitcoin network is evident in the monthly electricity consumption of the network. From January 2017 to May 2022, the monthly electricity consumption has multiplied over 17 times from 0.62 TWh to currently standing at 10.67 TWh. In comparison, companies such as PayPal, Alphabet and Netflix have witnessed their carbon emissions multiplied by 55, 38 and 10 times, respectively.

Collins spoke further about the perception of the Bitcoin network that could be changed in the future. He added that if more people approached Bitcoin (BTC) mining as a financial service as opposed to mining, sentiment surrounding PoW networks might begin to change, and the public may appreciate it more as an essential service as opposed to a reckless gold rush. He also highlighted the role of thought leaders in the community in conveying the true nature of Bitcoin mining to policymakers and the public at large.

Working together to solve the energy problem

Recently, there have been several examples of the Bitcoin mining community collaborating with the energy industry — and vice-versa — to work on methodologies beneficial for both parties. The American Energy company, Crusoe Energy, is repurposing wasted fuel energy to power Bitcoin mining, starting in Oman. The country exports 23% of its total gas production and aims to reduce gas flaring to an absolute zero by 2030.

Even the United States energy giant ExxonMobil couldn’t help but get in on the action. In March this year, it was revealed that Crusoe Energy had inked a deal with ExxonMobil to use excess gas from oil wells in North Dakota to run Bitcoin miners. Traditionally, energy companies resort to a process known as gas flaring to get rid of the excess gas from oil wells.

A report released by the Bitcoin Mining Council in January revealed that the Bitcoin mining industry increased the sustainable energy mix of its consumption by nearly 59% between 2020 and 2021. The Bitcoin Mining Council is a group of 44 Bitcoin mining companies that represent over 50% of the entire network’s mining power.

Cointelegraph spoke to Bryan Routledge, associate professor of finance at Carnegie Mellon University’s Tepper School of Business, about the comparison between the carbon emissions from Bitcoin and traditional banking.

He stated, “Bitcoin (blockchain) is a record-keeping technology. Is there another protocol that would be comparably secure but not as energy costly as PoW? There are certainly lots of people working on that. Similarly, we can compare Bitcoin to record-keeping financial transactions in regular banks.”

The block reward for mining a block of Bitcoin currently stands at 6.25 BTC, over $190,000 as per current prices, and the current average number of transactions per block stands around 1,620 as per data from Blockchain.com. This entails that the average reward of one transaction could be estimated to be over $117, a reasonable reward for a single transaction.

Routledge further added, “Traditional banks are a far larger size and so, in aggregate, have a large impact on the environment. But for many transactions, there is a much lower per-transaction cost — e.g., an ATM fee. BTC has lots of benefits, arguably. But surely becoming more efficient seems an important step.”

Since gauging the true impact of Bitcoin is not really a quantifiable effort due to the significant change that the technology and the currency represent, it is important to remember that the energy consumption of Bitcoin can’t be vilified in an isolated manner. The global financial community often tends to forget the high impact of the current banking system that is not offset by corporate social responsibility and other incentives alone.

Crypto 401(k): Sound financial planning or gambling with the future?

Cryptocurrencies may be coming to Americans’ retirement plans. Some see it as a sound financial strategy, while others remain skeptical.

In April, United States-based retirement plan provider Fidelity Investments moved to allow 401(k) retirement savings account holders to invest directly in Bitcoin (BTC), the flagship cryptocurrency, making crypto a potential part of one’s savings for the future.

A 401(k) is a retirement savings plan offered by many U.S. employers that give the saver tax advantages and allow for several different investment options. Fidelity’s move will make it easier for Bitcoin to be among those options.

In a typical 401(k) plan, employees agree to have a percentage of each paycheck paid directly into an investment account created for the plan, while employers often match part or all of the employees’ contributions.

Fidelity is the largest retirement plan provider in the United States, and its BTC rollout will make the cryptocurrency available to more than 40 million employees — assuming their employers decide to offer it. Investors who take advantage of the initiative could effectively become tax-advantaged long-term BTC hodlers removing coins from circulation every month.

The company’s plan limits BTC allocations to a maximum of 20% and allows companies to make the threshold even lower. Offering cryptocurrency options for 401(k)s isn’t new, however. In June 2021, another retirement plan provider, ForUsAll, partnered with Coinbase to offer BTC exposure to its account holders.

ForUsAll even recently filed a lawsuit against the Department of Labor and Secretary of Labor Marty Walsh in the United States District Court for the District of Columbia, seeking the withdrawal of a compliance assistance release.

The release states that the department’s Employee Benefits Security Administration will “conduct an investigative program aimed at” 401(k) plans that include cryptocurrency. Speaking to Cointelegraph at the time, ForUsAll CEO Jeff Schulte said the government was “trying to restrict the type of investments Americans can choose to make because they’ve decided today that they don’t like a certain asset class.”

Questions of government overreach aside, it’s also important to consider whether including crypto assets in a retirement plan is a good idea. The Bitcoin network has been around for over a decade and has outperformed every other asset class so far, but as any analyst will say, past performance does not guarantee future results.

Crypto volatility and 401(k) plans

Considering that Bitcoin and crypto assets in general are recent financial experiments only a little over a decade old, some investors may find digital currencies too risky. Cryptocurrencies can be highly volatile, and their value has been known to plunge by up to 80% during bear markets — something that could prove disastrous ahead of someone’s retirement.

While employees aren’t forced to withdraw from their 401(k) plans when they retire, the point of the money being there is to provide them comfort during their sunset years. Waiting for the market to recover or simply accepting such significant losses could be devastating.

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Chris Kline, co-founder and chief operating officer of Bitcoin IRA — a cryptocurrency-focused individual retirement account provider — told Cointelegraph that there is a “growing conversation around the adoption of digital assets and their growing use case.”

Kline pointed to Senator Tommy Tuberville from Alabama, who recently unveiled a bill, the Financial Freedom Act, that seeks to allow Americans to add cryptocurrency to their 401(k) retirement savings plans.

According to Kline, part of the “retirement crisis we have in this country [the U.S.] is due to a lack of participation in 401(k)s.” He added that such moves could be a way to get newer generations engaged through their employer-sponsored plans and help Americans retire while testifying to the resilience and relevancy of crypto assets. Kline added:

“Crypto is certainly volatile, but its resiliency and relevancy in its short existence are remarkable. Having at least some exposure — and more importantly, experience in crypto — is becoming paramount to modern investing.”

Cryptocurrencies could have the same disruptive impact on money that the internet had on communications or that email had on post offices, Kline stated.

Speaking to Cointelegraph, Scott Melker, a cryptocurrency influencer and the host of the Wolf Of All Streets Podcast, noted that every investor should have “at least minimal exposure” to Bitcoin, with Ether (ETH) a second possibility worth considering.

According to Melker, even a small allocation in these assets potentially offers “idiosyncratic risk and the opportunity to invest in an asset [that] can go up when everything else is dropping.” Melker added that crypto markets crashing ahead of retirement might not be the biggest concern, saying:

“Any market can crash ahead of retirement, so this is not a concern specific to Bitcoin. Investors in tech stocks right now are largely underperforming crypto in their retirement accounts.”

Melker added that investors should be allowed to invest in any asset they prefer for their retirement, concluding that while self-directed IRAs are “popular for this reason,” 401(k) holders haven’t yet had such an option.

A volatile asset class for diversified portfolios

Over the past few years, more and more people have come to consider cryptocurrencies an investable asset class, with demand clearly present for retirement savings. In a survey conducted by Investopedia, one in four millennial respondents reported that they are already using crypto to help fund their retirement goals.

Employers, however, still have their doubts. The Plan Sponsor Council of America recently surveyed its members, which are employers sponsoring qualified savings plans, and asked whether they are considering adding crypto to their investment options. Only 1.6% responded affirmatively.

*Sculpture of a bear and a bull on a seesaw, representing the changing markets, in front of Fross and Fross Wealth Management office in The Villages, Florida. Source: Whoisjohngalt.*

Speaking to Cointelegraph, Daniel Strachman, managing partner at A&C Advisors and an independent trustee of the Arca U.S. Treasury Fund, said that cryptocurrencies are nevertheless “something that a diversified portfolio should include.”

According to Strachman, an individual’s level of exposure to crypto assets should depend on several factors, including age, income, other assets and more. To him, it’s “all about investor education,” as there “needs to be significant information, content and educational programs available to investors, regardless of the size of their assets.”

Cameron Collins, an investment analyst at Viridi Funds — a company offering crypto and clean energy investment solutions — echoed Strachman. He told Cointelegraph that sound cryptocurrencies like Bitcoin “are great investments and deserve a place in 401(k) plans.”

According to Collins, memecoins and scam tokens with “no fundamental value” do not deserve a place in these types of investments, and policymakers — along with investors and plan administrators — should be made aware of this important caveat.

Cryptocurrencies, he said, offer “extreme upside potential” but lack investor protection, which can be a significant drawback. The upside potential may, however, be all an investor needs.

Giving prudent managers more opportunity

Having more options to invest across different assets, including cryptocurrencies, may give a prudent manager “more opportunity to optimize that long-term rate” of return, according to Thomas Perfumo, head of business operations and strategy at crypto exchange Kraken.

Speaking to Cointelegraph, Perfumo noted that retirement is often associated with low risk, but “This heuristic misses the market,” as $1 compounding over 30 years at an 8% rate will grow to surpass $10, while that same $1 compound over 30 years at a 6% rate grows to $5.74.

According to Perfumo, optimizing that rate of return over the long run is “how an individual builds wealth, overcomes the burden of inflation and ultimately accrues enough to retire comfortably.”

Perfumo added, “Risk tolerance evolves over a person’s lifetime. Someone closer to retirement, who may already have a significant amount of savings, will likely have a lower allocation to risk-on investments like cryptocurrency.”

He added that conversely, individuals at the start of their careers have “more capacity to take on risk and will likely allocate more of their capital towards risk-on assets.”

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The potential downsides to adding crypto to retirement investment plans, Perfumo said, involve fiduciaries failing to “act in their clients’ best interests by rushing into a risky product or misallocating their clients’ capital relative to their risk profiles.”

On the other hand, someone who wishes to manage a self-directed retirement portfolio “should have all available options at their disposal, so long as they are informed of the risks.”

Adding cryptocurrencies to 401(k) plans means adding tax-efficient investment opportunities for investors looking to hold onto their assets for an extended period of time. As with any other financial decision, the choice should be adapted to investors’ risk profiles and should only be made after thorough research and help from advisers if necessary.

Cryptocurrency investments do not match everyone’s risk profile, nor should they. They are voluntary, but they may be highly beneficial to investors who thoroughly understand the risks involved.