Bitcoin (CCC:BTC-USD) is in the news once again after pushing above $45,000 for the first time since May. I’ve repeatedly written about my issues with cryptocurrencies as a long-term investment. Essentially, Bitcoin bulls argue the cryptocurrency is either the new gold or will eventually be the new global currency. But neither gold nor traditional fiat or private currencies have ever been particularly good long-term investments compared to stocks.
Today, I want to focus on one of Bitcoin’s biggest problems in the near term.
Younger investors are increasingly prioritizing ESG-conscious investing. ESG stands for environmental, social and governance. Basically, investors want to support companies and assets that are helping the world rather than hurting it.
It’s very difficult to make the case at this point that Bitcoin is doing more good than harm. Here’s a closer look at why the cryptocurrency is a horrible ESG investment.
Bitcoin Is Terrible for the Environment
Some crypto bulls thought they had a new hero in Tesla (NASDAQ:TSLA) CEO Elon Musk when he announced Tesla would begin accepting Bitcoin payments back in February. Of course, Musk reversed course when environmentalists called him out on his hypocrisy.
“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 said in May.
The statement came as a part of Tesla’s announcement that it would no longer be accepting Bitcoin as payment.
Bank of America analyst Francisco Blanch performed a deep dive into Bitcoin’s ESG impact earlier this year. In his report, he explains exactly what Musk is talking about.
“Its Environmental score is poor: the network emits today about 60mn tons of CO2, the same as Greece,” Blanch says.
To make matters worse for investors, the higher Bitcoin prices rise, the bigger its carbon footprint becomes.
“As hash power today is mostly in coal-fired Xinjiang, a link between prices, energy demand & CO2 means Bitcoin is tied to Chinese coal,” Blanch says.
For example, Blanch said if the price of Bitcoin rose to $1 million, its mining would potentially generate as much of a carbon footprint as Japan. For perspective, Japan currently has the fifth largest carbon footprint of any country on Earth.
Personally, I believe Musk cares far more about his personal legacy as a technology disruptor than he does about the environment. I wasn’t surprised when he flip-flopped a second time in July and said Tesla will accept Bitcoin after all.
But the facts remain that Bitcoin and other cryptocurrencies are an environmental cancer at this point.
Social and Governance Impact
According to Blanch, Bitcoin’s social and governance ratings are mixed. When it comes to social impact, Blanch says the anonymous aspect of Bitcoin is a double-edged sword. He says the democratization and decentralization of money has the potential to make a major positive social impact. However, Bitcoin also has the potential to have significant negative social impacts.
Cryptocurrencies require access to the internet, which can be difficult and costly for many areas of the world. In addition, the anonymity of Bitcoin usage opens the door for illicit activity. In fact, blockchain researcher Chainalysis estimates there was at least $1.3 billion in money laundered via cryptocurrency wallets in 2020.
Bitcoin is used as ransom for cyberattacks, it’s used to fund terrorism and it’s used to evade taxes.
From a governance standpoint, Blanch says Bitcoin presents “mostly negative” consequences. Its decentralized nature once again means its largest stakeholders are relatively concentrated and unregulated. Bank of America found about 95% of global Bitcoin is controlled by about 2.4% of the world’s accounts.
The U.S. Securities and Exchange Commission has yet to approve a Bitcoin exchange-traded fund for listing on a major U.S. exchange. Lack of regulation and concern over investor safety are the primary reasons the SEC has given for its repeated rejections.
Maybe regulators will implement a more rigorous set of Bitcoin rules in the future. For now, Bitcoin governance is severely lacking.
Takeaway
If you care about ESG investing, Bitcoin is not for you.
If you don’t care about ESG investing, you should still consider the fact that Bitcoin doesn’t generate cash flow. It doesn’t pay interest or a dividend. It doesn’t produce a product or service. The only way Bitcoin prices continue to rise is if people and companies continue to buy more of it.
Maybe that buying will happen and maybe it won’t. Personally, I’ll be putting my money in high-quality stocks instead.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.
