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Cathie Wood vs. Elon Musk and the Great Bitcoin Energy Debate

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What You Need to Know

  • Musk says Tesla will no longer take Bitcoin as payment because of heavy fossil fuel use in mining the cryptocurrency.
  • Wood insists Bitcoin uses lots of renewable energy and blames Musk, in part, for its recent price drop.
  • Advisors whose clients invest in crypto and clients who buy assets based on ESG factors should understand the debate.

How should advisors view the debate between Cathie Wood and Elon Musk on the carbon intensity of Bitcoin, especially if they have clients interested in cryptocurrencies and clients who favor low-carbon assets — perhaps even the same clients?

Production of Bitcoin, the most actively traded cryptocurrency, uses lots of energy, which produces lots of pollution. Estimates range widely, from between 22 and 22.9 million metric tons of carbon dioxide emissions a year (near the levels produced by Jordan and Sri Lanka),  according to the French scientific journal Joule, to over 130 million metric tons in China alone, according to a 2019 study published by Nature Communications.

Last month, Musk announced that Tesla would no longer take Bitcoin as payment for its electric vehicles, sparking a big selloff in the cryptocurrency from which it hasn’t yet recovered. “We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel,” Musk tweeted.

But a sizable portion of Bitcoin production is powered by renewable energy sources — estimates range from a low of 39%, according to the Cambridge Centre for Alternative Finance, to 73%, according to CoinShares Research.

Cathie Wood has repeatedly said that Bitcoin mining is heavily powered by renewable energy, and her firm released a report in April that asserted that “a world with Bitcoin is a world that, at equilibrium, generates more electricity from renewable carbon-free sources.”

Late last month, Wood, the founder of Ark Investment Management, blamed the recent drop in cryptocurrency prices — Bitcoin is near $37,000, about 43% below its record high near $65,000 in mid-April — on the “ESG movement” and Musk’s comments that fed “the notion … that there are some real environmental problems with the mining of Bitcoin.” Her firm’s flagship Ark Innovation ETF (ARKK), which still has large holdings in Tesla, Coinbase and Square, has lost all its gains from earlier this year and is now down 30% from its record high in February.

Bitcoin vs. Ethereum in Energy Usage

Matt Hougan, the chief investment officer of Bitwise Asset Management, which runs the first ever cryptocurrency index fund and other crypto funds, tells ThinkAdvisor that many who criticize Bitcoin on the basis of its energy consumption don’t think Bitcoin has any value.

He admits Bitcoin uses lots of energy — both from nonrenewable and renewable sources — but notes that use is what “makes the Bitcoin blockchain the most secure in the world.”

Bitcoin uses a “proof of work” mechanism, which requires all of its miners to solve a complex puzzle to put more Bitcoin into circulation. Those computations require massive amounts of electric power.

The Ethereum blockchain is in the process of moving from a proof of work mechanism to a proof of stake, or ownership, which uses less energy. Miners can mine or validate block transactions based on the amount of coins they hold.

That move will mean that the “crypto market will compete on carbon intensity vs. carbon neutral,” said Hougan.

Chia, Anyone?

In the meantime, financial advisors like Jeff Gitterman, the co-founding partner of Gitterman Wealth Management which specializes in sustainable impact investing along with investments focused on environmental, social and governance factors (ESG), are avoiding Bitcoin because “it’s so far from ESG.” But he’s watching the development of Chia, a new crypto coin that uses available storage on computers to “farm” the currency combined with “time” to assign chunks of storage space, which is much more eco-friendly.

When clients ask about investing in cryptocurrencies, Gitterman, who owned Grayscale’s Bitcoin Trust awhile back but sold it because it “wasn’t a good enough ESG story,” will point them in the direction of owning or buying crypto, but he won’t buy it for them.

Whether it’s Bitcoin, Ether, Chia or another one of the many cryptocurrencies on the market, advisors need to realize that this “new asset won’t disappear,” says Garvin Jarbusch, co-founder and chief investment officer of Green Alpha Advisors. His firm specializes in sustainable investments and doesn’t own any crypto assets because they are outside its mandate of being equity manager.

The Bigger Energy Picture

Jabusch views the issue of Bitcoin energy use as part of the bigger issue of energy usage overall  and where power is coming from. “Renewables have to be our default for whatever the use case is,” he says. “What we need to do is green up the grid.”

Doug Heske, CEO of Newday Impact Investing, an impact investment platform, says Wood is right about the heavy use of renewable energy sources in Bitcoin mining but that Musk made the right call.

Musk’s reversal on Bitcoin “was the right thing to do because Tesla’s mission is to support a zero-emission future” and “millions look to Musk.”

Bitcoin mining consumes massive amounts of energy but  “crypto mining companies understand all this,” says Heske. Some have developed or signed onto the Crypto Climate Accord, modeled on the Paris Climate Accord, with a net zero emissions goal by 2030. “It’s a positive sign that the industry is taking the issue of climate change very seriously.”