The ESG Case for Bitcoin
In early 2021, we decided the time was right to add cryptocurrency (specifically bitcoin) to our portfolios. Bitcoin has grown into a 1 trillion-dollar asset class and has a very low correlation to other asset classes we invest in. Furthermore, it has a history (although relatively short one) of very high returns and the bitcoin network continues to expand rapidly (see Metcalf’s law), indicating that we should continue to see future price appreciation. We believe it’s in our client’s best interest to own a small amount of this exciting asset class, which is why we have added it to our portfolios. Due to the volatility and relatively small size of the asset class, we’ve started with a small position.
We understand that there are concerns around bitcoins’ environmental impact. We share these concerns as environmental, social, and governance issues are very important to us, but we are of the opinion that bitcoin solves far more problems than it creates. We've listed a few of the ESG concerns it addresses below:
Financial Inclusion: There are numerous documented cases across the United States of financial discrimination by banks. This relates to loans (including mortgages) and more. In our opinion this has exacerbated inequality and the wealth gap in the United States and contributed to the oppression of minority groups. On the other hand, bitcoin is censorship resistant and decentralized so the protocol itself cannot discriminate. There are already lending platforms available through Blockfi, Nexo.io. and various decentralized finance (DeFi) lending platforms (although we do not necessarily recommend these yet since it’s new technology and there is risk involved). The bottom line is that bitcoin and decentralized finance have the potential to create a far more equal, fair, and inclusive financial system.
Inflation Hedge: Around the world countries such as Venezuela, Turkey, Zimbabwe, Lebanon, and Argentina are experiencing official inflation rates well over 15% (we personally believe the real numbers are much higher than this in many cases). These are the most egregious countries, but there are many, many more with official inflation rates over 10%. The effects of this are often devastating for citizens of these countries. People in these countries cannot hold value in their own currency and often lack accessibility to a stable currency. Bitcoin is increasingly seeing rapid adoption in these countries as a store of value since it cannot be inflated away. Furthermore, it can be held privately and is incredibly difficult, if not impossible, for an authoritarian government to confiscate it.
Wealth Inequality: Speaking of inflation, over 25 trillion has been pumped into the global economy since 2008 with over 7 trillion dollars being pumped into the U.S. economy. This money has dramatically driven up the value of the stock market as well as housing prices. This has arguably been great for those of us fortunate enough to own houses and stocks, but 45% of our country owns almost no investable assets - they rent instead of owning a home and have very little, if anything, in the stock market. Inflation has not been kind to those with no investable assets resulting in an increase in wealth inequality. This has led to increased populism and social unrest, and we expect this trend to continue if inflation remains high. Although volatile, bitcoin cannot be inflated away as there is a limited supply of 21 million. It allows those who don't own stocks and/or houses to save in an asset with a limited supply that should continue to increase in value instead of losing its purchasing power over time like all fiat currencies do.
The Petrodollar System: Our current financial system relies on our worldwide military presence and arguably the primary purpose of this military presence is to maintain the dollar as the global reserve currency. Furthermore, finance makes up 8% of the US economy. We believe the carbon footprint of our current financial system far outweighs the environmental concerns related to bitcoin mining, which already uses over 60% renewable energy to mine. We believe the energy used to secure the bitcoin network is far less than the energy used to secure the US dollar as the global reserve currency.
These are a just a few of the reasons why we believe that bitcoins’ benefits from an ESG perspective far outweigh its downsides. More to come on this in the future. :)