Massive Institutional Risk To Bitcoin?
Major parts of mainstream media and tech media continue to report changes in Bitcoin value linked to prominent events like new regulations in a single country, for example, in China, India, or the U.S.
Those can be real, but also, analysts are warning that behind the scenes, many more general pressures are having enormous impacts on Bitcoin prices, which are by any measure quite volatile.
For background, Bitcoin’s value has been on a rollercoaster ride over the last twelve months. Bitcoin’s price was cut in half, rose back up to all-time highs and then fell off a cliff one more time.
According to experts the cause of the price declines is a factor few pay attention to, something called ESG. This new way of looking at investment is somewhat recent – some attribute its origin to Kofi Annan at the United Nations just a few decades ago – but it has quickly taken hold in the information age as a way to scrutinize the impact of investments by any institutional party.
What is ESG?
“Environmental, social and corporate governance” or “ESG” is a certain set of criteria for investors that lays out some ethical and social rules for responsible investing. A framework called PRI uses these criteria, and firms like MSCI provide ESG ratings.
ESG is named after its three components – environmental, social, and governance criteria.
The environmental criteria include the ecology of a business or investment – its energy consumption, for instance, and efficiency overall in the age of climate change.
The social criteria look at how employees are treated, and what impact a company or operation has on society as a whole.
Governance criteria look at the structure of holdings and how they are administrated, and also consider cybersecurity outcomes.
With all of this in play, stakeholders deliver ESG scores to individual investments, and institutions are paying attention.
BlackRock and Regulatory Influence
As a major mover in this area, BlackRock, the largest institutional asset manager of its kind, has spearheaded efforts to bolster ESG a criterion for investment. In short that’s bad for energy stocks, and bitcoin mining famously requires lots of energy so by inference it too is in the crosshairs.
Analysts point to efforts by organizations like the United Nations and World Bank, in conjunction with auditors and accounting firms like Deloitte and PWC, that have codified ESG norms and standards. Most recently, Gary Gensler of the U.S. Securities and Exchange Commission has expressed enthusiasm for big changes related to both environmental impact and governance of cryptocurrencies, and by proxy, for the kinds of considerations that ESG promotes.
If institutional money managers must adhere to ESG criteria to invest and bitcoin is on the list of unattractive assets like oil companies, what does the future hold for bitcoin price?
What Does ESG Mean For Bitcoin Price?
In the environmental realm, it’s simple – ESG funds will suggest that institutions should abandon companies and holdings with a poor track record on global emissions, and other ESG factors.
That’s bad news for corporate polluters, but it’s been especially bad news for Bitcoin, which has been associated, in months past, with carbon impacts rivaling the energy footprints of the 30 largest nations in the world.
First of all, those looking at Bitcoin prices often cite the 12% drop that happened after Tesla said it would not accept Bitcoin as payment in exchange for its electric vehicles.
At the time, it seemed that this was a straightforward market correction based on Bitcoin’s poor ecology – but could it have been an ESG phenomenon that was broader and perhaps less targeted than Elon Musk’s individual criticism?
Institutional Crypto Investing: Between a Rock and a Hard Place
It’s important to note that as institutions are investing more into cryptocurrency markets, they are also listening more to ESG guidance. That creates an inherent contradiction that market players have to navigate.
In addition, there is an argument to be made that environmental concerns are not at the top of the list anymore for ESG auditors, in terms of Bitcoin concerns and downsides.
With more Bitcoin miners committed to using green energy and more of them in the U.S. after China crackdowns, some of the ESG pessimism is now focused on governance, with important parties telling investors that companies “don’t understand what they’re buying” when they invest in Bitcoin or some other cryptocurrency asset.
ESG Impact on Bitcoin
In response, you’ll see Bitcoin’s hash rate and miner profit margins fluctuating. You’ll see significant price drops in per-coin value, and resulting media attention to Bitcoin’s flaws
To some, this is an important market correction as part of our new climate-conscious world. To others, it’s FUD (investor-speak for fear, uncertainty, and doubt).
In any case, though, investors need to be careful and factor in the ESG impact as they consider Bitcoin holdings. Buy and holders are enthusiastic that Bitcoin will someday become a gold standard for new digital money – but if they can’t beat the ESG challenges, smart money would suggest that Bitcoin will struggle attain this position and that someday, perhaps someday soon, its value will tank based on a herd mentality on the part of investors who fear its drag on carbon neutrality or some other ESG concern.
