Two of the biggest trends in the investing industry are on a collision course.
As cryptocurrencies and digital assets increasingly find their way into institutional portfolios — albeit largely absent from retirement plans — there is ultimately a big roadblock to the largest pots of money: ESG considerations.
Cryptocurrencies, and in particular bitcoin, require a staggering amount of energy to "mine" and process transactions.
According to the Cambridge Centre for Alternative Finance, bitcoin now makes up an estimated 0.59% of global energy consumption and consumes more energy in a year than Argentina or Norway.
That amount of energy puts it at direct odds with ESG and sustainable investing, which tripled over the past eight years to $40.5 trillion in 2020, according to research firm Opimas. US SIF reported that sustainable investing represented one-third of professionally managed assets in the U.S. at the start of 2020.
With cryptocurrency assets reaching into the trillions of dollars at this point as well, it seems to be an ideological division. While plenty of investors do not espouse ESG principles, asset owners like pension funds, endowments and foundations are largely moving to at least some sort of ESG lens for their portfolios, especially in Europe.
There are certainly many variables to consider when it comes to investing in cryptocurrencies, and it's hard to ignore some of the chart-busting returns, including bitcoin rising sixfold in the past year despite higher volatility than traditional securities. But for any investor committed to ESG, an investment in cryptocurrency appears to be an easy pass until there is significant innovation on greening the energy use that cryptocurrencies require.
The ESG considerations don't even take into account the discussions sophisticated institutional investors are having on any real practical use of cryptocurrencies other than as a speculative investment that seemingly continues to beget more speculation.
Will there come a point when the bottom drops out for all this? What happens if or when the Federal Reserve introduces a central bank digital currency? For the cryptocurrencies that survive, surely there will have to be some kind of stabilized price mechanism that will limit the massive return upside seen in this current market. It doesn't seem like it's in the cards for sophisticated institutional investors to be holding the bag in the end.