Once hailed as the super asset, Bitcoin has recently been facing headwinds. Root cause is its exorbitant carbon footprint. But how does the cryptocurrency fare in other sustainability aspects? We took a closer look and examined Bitcoin according to the ESG criteria commonly used in the financial sector.
Words have power, and tweets do to! Elon Musk's message of 280 characters this spring put the cryptocurrency Bitcoin at the center of popular discussion forums, and suddenly it was being eagerly discussed at the lunch table. At a time when we skip school for the good of the climate, grow meat in the lab and offset our flights in a CO2-neutral way, personal enrichment at the expense of the environment seems simply intolerable.
But how does Bitcoin actually perform in the sustainability rating? We checked the cryptocurrency for the three ESG categories of environment, society and governance and not only confirmed assumptions, but also discovered some surprising facts. Download the full evaluation in our factsheet.
To do so, we broke our research down to three specific questions per ESG category. Based on the assessment of these criteria, a score between A+ and D- is calculated per category. The overall rating is made up of one third each of the individual scores for environment, society and governance, whereby a score in the D category cannot be compensated for by high scores in the other two dimensions. Learn more about the scoring on this here.
Climate crisis full throttle
As expected, Bitcoin performs terribly in the environmental category due to the proof-of-work principle and collects the lowest possible score of D-. This is due to the exorbitantly high power consumption of an average of 100 terawatt hours per year and around 1,000 kilowatt hours per transaction. By comparison, the energy cost for one single transaction is higher than than what the average person in El Salvador (915 kWh), India (857 kWh) or Morocco (794 kWh) consumed in 2020.[1] This excess becomes even more apparent when we visualize all the things that can be done with a single kilowatt hour of electricity today: We can blow dry our hair for an hour, work actively on a laptop for around 50 hours, watch Netflix for seven hours or read under an energy-saving lamp for 91 hours.[2]
For the rating, however, not only quantifiable aspects such as current electricity consumption are consulted. We also evaluate how explicit the plans for reducing the CO2 footprint are. Bitcoin receives a poor rating here as well. Despite various projects trying to reduce electricity consumption or at least recycle the resulting heat, the motivation to switch to renewable energy seems low. For a significant improvement of the environmental balance, however, the type of energy generation plays only a subordinate role. The mining process is much more important: The proof-of-work approach used for Bitcoin requires that as many miners as possible classify decodable information as correct with the help of coding. The computing power required for this consumes enormous amounts of energy. As long as Bitcoin does not switch to the proof-of-stake method, energy consumption will therefore remain high and the GCR Sustainability Rating low.
Surprising turnaround in the social sphere
As with many things in life, Bitcoin is not all bad. Case in point: The cryptocurrency wins brownie points in the social sphere for its decentralized approach, as participation is theoretically open to anyone with access to a computer and does not limit the number of miners or mining pools. Yet, in practice, the high transaction costs ensure that a large part of the world's population is excluded from using the Bitcoin blockchain. Another important indicator of social sustainability is the question of a socially acceptable distribution of digital assets - does a little belong to everyone, or does it all belong to a few? Here, Bitcoin proves to be more balanced: There are no super large holders owning more than 10 percent of the assets and only one address owns more 1 percent of all Bitcoins (being the exchange Binance, currently the largest exchange for cryptocurrencies). Thus, the overall wealth distribution seems pretty good. Bitcoin thus scores relatively well in social sustainability and receives a social score of B-.
Governance as biggest plus
Bitcoin ranks in the top when it comes to rules, regulations and governance, leading to the excellent score of A. This is partly due to the distribution of the miners: In addition to their number, the number of miners needed to achieve 50 percent of the cryptocurrency network's computing power is also important. Bitcoin is considered well diversified, while a total of four miners are needed to control the network.
Equally relevant is the management of potential conflicts of interest that may arise from anonymity or the irrevocability of transactions, among other things. According to its own statements, the Bitcoin Foundation takes care of "coordinating the efforts of the members of the Bitcoin community" and operates on a non-profit basis. Unlike other foundations, such as Trone or Binance, it does not assume a control function, but only makes recommendations. The miners thus remain completely autonomous and regulate themselves.
The evaluation in the field of governance ends with the question of security. How safe is the technology and how high is the number of known gaps or breaches? Since no incidents have been recorded since the introduction of Bitcoin in 2009, a high security factor can be assumed.
In short: compliant, but harmful
Those who care about the environment and the climate are certainly not in favor of Bitcoin – and rightfully so. The respectable scores in social sustainability and governance cannot sugarcoat Bitcoin’s damaging impact on the environment. Therefore, the cryptocurrency falls flat in the GCR Sustainability Rating with a D as the overall score.
[1] https://www.indexmundi.com/map/?v=81000&r=xx&l=de, 2020 [2] EnBW Energie Baden-Württemberg, 2021
Please note that we regularly review and update our ratings. It is therefore possible that the scores mentioned in the blog post no longer correspond to the current rating. You can find an up-to-date overview of all ratings at any time at greencryptoresearch.com/ratings.
What is the GCR Sustainability Rating?
The GCR Sustainability Rating is the first ESG rating tailored to cryptocurrencies and adjusted accordingly. It reflects the holistic assessment of a cryptocurrency and is composed of three individual scores:
The GCR Sustainable Rating is a relative ranking, meaning that the best cryptocurrency in each category receives an A rating, while the worst receives a D rating. The overall rating ("GCRS rating") is based on three individual ESG categories. An average score is calculated for each category. The overall rating corresponds to the worst ESG score so that failures in a single category cannot be compensated for by good scores in the other two. Thus, if a cryptocurrency is judged not to be environmentally sustainable, it cannot make up for the poor rating with adequate social standards or good governance.
Comments