Criticisms about bitcoin’s energy use often lead people to believe that Bitcoin is contrary to the goals of environmental, social and governance (ESG) compliance…
However, as people get smarter about how the technology works, evaluations of bitcoin and ESG suggest that the opposite is true.
Indeed, a report by KPMG supports the view that, when examined through the lens of environmental, social and governance (ESG) investing, bitcoin’s open source, peer-to-peer, global financial infrastructure is one of the most transparent, data-driven ESG investments available today.
What Is Bitcoin?
Bitcoin is a decentralized, open source, global financial infrastructure project.
Bitcoin’s software implementation can be separated into two components, 1) the decentralized software that runs the peer-to-peer Bitcoin network (aka “Bitcoin“) and 2) the unit of account, or cryptocurrency, known as bitcoin (with a lowercase b, aka “BTC”).
1) Bitcoin Network
Bitcoin (uppercase “B”) is an open monetary network and payments system that enables anyone with a bitcoin address to receive a payment of bitcoin from any other person.
To accomplish this without relying on any central intermediary, such as a bank or fintech provider (eg. PayPal, Venmo, Cash App, etc.), every transaction is publicly announced and participants agree on a single history of all transactions that have ever occurred.
Each transaction is time stamped using a hash, which includes the hash of the previous transaction, forming a chain. A decentralized network of individual volunteers, referred to as nodes and miners maintain full copies of the bitcoin blockchain, verify transactions comply with the rules and perform proof of work to secure the Bitcoin network.1
- Nodes validate bitcoin transactions as they are submitted to the network. Nodes also monitor and verify groups of transactions, called blocks, to be added in compliance with Bitcoin’s deflationary monetary policy as they are mined by miners.2
- Miners group transactions into blocks for addition to the blockchain. Miners invest energy and computing power to perform hashing, thereby providing “Proof of work”, in a competition with other miners to secure the Bitcoin blockchain and earn newly issued bitcoin, or BTC.
Anyone who wants to can voluntarily participate as a miner and/or a node.3
Indeed, running a node is easy, accessible and affordable because the block size was deliberately kept small. Bitcoin mining is also accessible to anyone… However, mining bitcoin requires an investment in mining equipment, which can be expensive to own and operate.
As described here, miners that earn new BTC are not solving complex math problems, but are essentially winning a computational lottery. BTC is issued as a block reward for miners approximately every 10 minutes. The current block reward is 3.125 BTC.
The block reward is reduced by 50% every four years in an event known as the halving, or “halvening”. The next halvening will happen around the month of May 2028, at which time the block reward will be further reduced by half.
2) bitcoin, the Unit of Account (aka “BTC”)
BTC or bitcoin (lowercase “b”) is the native digital asset, or currency, of the Bitcoin network.
BTC fulfills the three functions of money: a medium of exchange, store of value and a unit of account:
- Medium of exchange: Money must facilitate transactions. As a medium of exchange, BTC is highly liquid. Indeed, you can purchase BTC on any number of exchanges 24 hours a day, every day of the year. Each bitcoin is divisible into 100,000,000 smaller units, called Satoshis. Satoshis can be purchased or earned for free in various ways. Bitcoin is accepted as payment at thousands of locations. Countries are making it legal tender, states are adopting it, and professionals are being paid in it.
- Store of value: Money must hold its value over time. Like other scarce assets such as gold or real estate, over a longer time horizon, the value of bitcoin has gone up and to the right. This makes bitcoin one of the greatest stores of value in history. Like the stock market, Bitcoin is volatile… However, volatility is a very different metric than risk.
- Unit of account: The value of any good or service can be measured using bitcoin, or Satoshis, as a unit of account. Indeed, if ownership of money comes down to entries in a ledger, bitcoin is the first money with a verifiable, public ledger proving the ownership of each unit of bitcoin throughout history.
BTC has a limited supply and only 21,000,000 bitcoins will ever exist… The last bitcoin is expected to be mined in the year 2140.
Bitcoin and ESG
Since its launch in 2009, bitcoin has stayed true to its roots as globally inclusive, open source, financial infrastructure…
A recent report by KPMG evaluates the environmental, social and governance impact of bitcoin and dispels some misconceptions about bitcoin and ESG that still exist today.
Here is a summary of the main points the KPMG white paper makes about how bitcoin and ESG are aligned:
Summary of Main Points:
- Bitcoin mining can incentivize increased integration of renewable energy into the grid by acting as a flexible load that consumes excess renewable energy supply. Research completed by Cornell, and partially funded by the National Science Foundation, also indicate that bitcoin can support investments in renewable energy.
- Bitcoin miners can participate in demand response programs to help balance electrical grids by curtailing energy usage.
- The heat generated by bitcoin mining rigs can be recycled to provide heat for buildings, homes, greenhouses, etc.
- Bitcoin mining operations can capture vented methane from landfills and flared natural gas, reducing emissions while monetizing wasted energy.
- Bitcoin provides social benefits like lowering remittance costs, enabling fundraising during crises, expanding electricity access in rural areas, and promoting financial inclusion.
- Bitcoin’s decentralized governance and immutable ledger enhance transparency and prevent misuse by powerful parties.
How Bitcoin And ESG Are More Aligned Than Not
The KPMG report sheds light on how bitcoin can actually support environmental, social, and governance (ESG) objectives.4
Environmental
On the environmental front, bitcoin mining operations have the flexibility to locate near renewable energy sources and consume excess supply during periods of low demand. This can incentivize further buildout of renewable capacity by improving the economics of such projects.
Additionally, miners can participate in demand response programs, curtailing operations to reduce strain on the grid.
The heat generated by bitcoin mining rigs, which is often wasted, can be repurposed to heat commercial and residential buildings through innovative solutions… Repurposing waste heat in commercial buildings can be useful for complying with local green building laws, such as Local Law 97 in New York City.
Mining operations can also reduce greenhouse gas emissions by capturing vented methane from landfills and flared natural gas from oil/gas operations, converting it into energy for mining.
Social
Socially, bitcoin enables nearly free cross-border payments, reducing remittance costs in some developing nations where a significant portion of GDP comes from such transfers.
As mentioned above, bitcoin is “permissionless” which means that anyone with a bitcoin address may receive a payment in bitcoin from another individual on the network, without the need for an intermediary, such as a bank.
Bitcoin’s lack of reliance on “trusted third parties” has proven valuable for rapidly crowdsourcing funds during crises like the Ukraine war. Bitcoin mining can also help stabilize microgrid operations in rural Africa, expanding electricity access at lower costs.
Governance
From a governance perspective, bitcoin’s programmatic monetary policy and decentralized design prevents any single party from controlling the network rules or manipulating transaction data on the immutable blockchain ledger.
The production of new bitcoin follows a pre-determined schedule that can be validated in real time. For instance, the most recent “halvening” occurred on April 20th, 2024 within a week or two of predictions years ahead of time.
Bitcoin transactions are readable on the public blockchain and anyone who wants to may access them. Contrary to what many may have read, bitcoin’s transparency means it is not the preferred method of money launderers and criminals… By nature transactions are visible and easily tracked, thus resisting misuse by powerful entities or authoritarian regimes.
Summary
While bitcoin’s energy footprint is a valid concern, the KPMG white paper highlights innovative ways the ecosystem is turning this perceived drawback into opportunities to drive sustainability and positive social impact across multiple ESG dimensions.
More and more, climate advocates and leaders in renewable energy, such as Texas, are engaging with the bitcoin community to explore collaborative approaches.
Footnotes
- All computers on the Bitcoin network are technically "nodes". However, miners are specialized nodes that invest energy and computing power to find hashes and add blocks to the network, and nodes verify the validity of individual and blocks of transactions for addition to the blockchain.
- A Bitcoin node is a computer that runs the Bitcoin software to independently verify Bitcoin's supply. There are two types of Bitcoin nodes, "full" nodes and lightweight or "Simple Payment Verification" or SPV nodes. SPV nodes do not maintain a full copy of the Bitcoin blockchain. keeps a copy of the entire history of the blockchain, including every bitcoin transaction that has ever occurred since Bitcoin was launched in 2009. Because you can independently run your own node, the Bitcoin network is considered “trustless”... At the end of the day, you don’t have to trust a banker, politician or anyone to tell you the state of Bitcoin because you can verify everything yourself if you want. For non-technical, absolute beginners, you can build a personal node (or buy a “plug and play” one) using a service called “Umbrel” and follow the instructions. While nodes don’t earn BTC, Umbrel makes it fun to run a node with simple to follow instructions and a great user interface that makes it easy to set up your own Bitcoin node and take advantage of other "sovereign" apps using your home Internet connection.
- Volunteering to be a node and/or a miner is fun because, in addition to being very educational (and potentially financially rewarding) you are contributing to a global community effort to help the Bitcoin network operate while maintaining the blockchain's integrity and resilience in a measurable way. While bitcoin mining got its start in basements and dorm rooms, bitcoin mining operations are mostly industrial scale today.
- Cornell University published a separate analysis of how bitcoin may be utilized to benefit the growing renewable energy on the grid.
