Bitcoin's Ethical Investment: Exploring The Moral Minefield

Bitcoin is a digital currency that has seen its value rise by almost 500% in 2017 alone. However, its rapid rise has sparked debates about its ethical nature as an investment option. The discussion revolves around the environmental impact, social implications, and governance concerns associated with Bitcoin. On the one hand, Bitcoin offers benefits such as lower transaction costs, enhanced individual freedom, and the potential to equalize wealth. On the other hand, critics argue that the process of mining Bitcoin consumes enormous amounts of energy, potentially exceeding the annual energy consumption of entire countries. Additionally, the anonymity provided by Bitcoin has facilitated criminal activities, and its speculative nature has led to comparisons with economic bubbles. As a result, the question of whether Bitcoin is an ethical investment remains a subject of ongoing debate.

Bitcoin's environmental impact

Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy—more than is used by some small countries—to perform the work associated with crypto mining. The energy intensity of crypto mining is a feature, not a bug. Bitcoin mining is the automated process of validating Bitcoin transactions without the intervention of trusted third parties like banks.

The way the transaction validation process is designed uses large amounts of energy—the network depends on the computational power of thousands of computers. This dependency maintains the security of cryptocurrency blockchains that use proof-of-work consensus.

The largest country for Bitcoin mining is the United States, which accounts for 37.84% of Bitcoin mining activities. Researchers at the University of Cambridge report that most Bitcoin mining occurs in the U.S. (38%), China (21%), and Kazakhstan (12%). According to the Center for Strategic and International Studies, about 76% of the energy consumed in China is generated from coal and crude oil. The U.S. gets most of its electricity by burning fossil fuels, per 2019 data from the EIA. Kazakhstan mainly uses fossil fuels.

As a result, three countries heavily dependent on fossil fuels are responsible for around 72% of the world's Bitcoin mining. The Bitcoin network is responsible for about 73 million tons of carbon dioxide per year—equal to the amounts generated by Oman. Based on data through December 2022, Ethereum produced an estimated 35.4 million tons of carbon dioxide emissions before dropping to 0.01 million tons following its transition to proof of work.

Over 77 kilotons of electronic waste are annually produced as a byproduct of Bitcoin mining. Due to the heat generated by mining machines, miners, manufacturers, and maintainers have turned to water cooling to reduce the costs of keeping equipment cool. In some cases, large mining farms have discharged hot or warm water into lakes or other water bodies, raising concerns about raising the average temperature of or contaminating these bodies.

Bitcoin's social impact

However, there are also negative social impacts associated with Bitcoin. One of the most significant concerns is the amount of energy consumed by Bitcoin mining, which has been criticised as wasteful and ecologically degenerative. The process of mining Bitcoin involves solving complex mathematical equations using powerful computers, requiring vast amounts of computer processing power and electrical energy. This has led to concerns about the environmental sustainability of Bitcoin and its potential contribution to climate change.

Another social impact of Bitcoin is its association with criminal activity and the dark web. The anonymity provided by Bitcoin transactions has made it a popular currency for cybercriminals and illegal activities such as drug sales. While it is important to note that Bitcoin use is not completely anonymous, and prosecutions have occurred for illegal activities, the currency does create challenges for law enforcement by requiring a shift from preventive to reactive enforcement.

Bitcoin has also been criticised for its potential to create a new wealth gap, particularly among younger, tech-savvy investors. The speculative nature of Bitcoin investing has led to concerns about the stability of the currency and the risk of price crashes. This instability can have social consequences, particularly for those who lose money or are left behind in the new wealth distribution.

Overall, the social impact of Bitcoin is a highly debated topic, with valid arguments on both sides. While it offers increased individual freedom and the potential for cost savings, it also raises concerns about energy consumption, criminal activity, and wealth distribution. As Bitcoin continues to evolve and gain popularity, its social impact is likely to become even more pronounced, and it remains to be seen whether the positive or negative effects will predominate.

Bitcoin's governance

Bitcoin governance is a complex and evolving concept, given the decentralised nature of the cryptocurrency. While the term 'governance' implies a situation where leaders act as proxies for the masses, this is not how Bitcoin operates. Instead, Bitcoin governance is based on consensus-building, where deliberation and persuasion are critical, but all participants always retain volition. This means that Bitcoin is defined by its users, and unless the vast majority agree to a change, the status quo will remain.

Bitcoin is not a static protocol. Developers work on it to fix critical bugs and deliver upgrades, but the process for evolving it is very different from a centralised entity, where decisions are made in a top-down manner. The default culture among Bitcoin users is that the protocol does not change unless it is absolutely necessary.

Bitcoin Improvement Proposals (BIPs) are a formalised process for deciding what changes are needed and how to integrate them. This process is not strictly applicable to Bitcoin due to its decentralised nature, but it provides a framework for developers to suggest and implement changes.

The process for improving the Bitcoin protocol is quasi-political, with stakeholders jockeying for power and influence. It is not a democracy or any other kind of formal political system, but an opt-in system where everyone has a choice.

Additionally, the lack of central authority in Bitcoin governance can make it difficult to address issues such as hacks or losses, as there is no clear leadership to implement changes or protections. This secrecy and lack of accountability are part of what makes Bitcoin unappealing as an ethical investment.

While Bitcoin governance is unique, some parallels can be drawn with other governance models, including constitutional law, corporate governance, and internet governance. However, these analogies are not perfect, as Bitcoin's decentralised nature and the lack of clear separation of powers or roles set it apart.

In conclusion, Bitcoin governance is a complex and ever-evolving concept that is shaped by the users and stakeholders of the cryptocurrency. It is based on consensus-building and opt-in systems, with a focus on preserving Bitcoin's decentralised nature and censorship-resistant property. While it has been successful in dealing with crises, it also presents challenges and may not provide adequate protection for users in certain situations.

Bitcoin's price manipulation

Bitcoin is a digital currency that operates outside of existing financial systems and offers the ability to instantly transfer money and property at very low costs. However, its price has been suspected of being manipulated by a single "whale" entity.

In 2017, Professor John Griffin of the University of Texas McCombs School of Business, along with Amin Shams, a doctoral candidate, observed strange patterns in Bitcoin's price movements. They noticed that whenever new batches of Tether, a cryptocurrency token that is supposed to be backed one-for-one by the US dollar, were printed, the price of Bitcoin seemed to jump.

Griffin and Shams analysed 200 gigabytes of trading data and sales and purchases from 2.5 million separate wallets. Their findings revealed that a single Bitcoin "whale" was responsible for distorting the trading of the token and driving its giant run-up in late 2017 and early 2018. This entity used the freshly printed Tether as "free money" to inflate Bitcoin's price for their own profit.

The same mechanism of price manipulation was suspected again at the end of 2022, when Bitcoin's price seemed to bounce every time it breached the $16,000 mark, exhibiting unusual stability for a token that typically sees high volatility. This stability occurred even amidst the crypto crash and negative forces, such as the collapse of FTX, one of the largest exchanges in crypto and financial history.

While there is no definitive proof of collusion or manipulation, the signs are troubling. Griffin suspects that a similar dynamic is at play, with a group of manipulators pushing Bitcoin to higher floors. He believes that the Bitcoin market remains highly vulnerable to manipulation and that the truth may emerge through specific stories or investigations.

Bitcoin's energy consumption

The high energy consumption of Bitcoin is attributed to its proof-of-work mining process, where miners solve complex cryptographic puzzles to validate transactions and add new blocks to the blockchain. This process requires significant computational power and energy to operate the machines and cool the equipment. As a result, Bitcoin miners are constantly seeking low-cost energy sources, which often leads to the use of fossil fuels. According to Digiconomist, most mining facilities in Bitcoin's network are powered by fossil fuels, contributing to its large carbon footprint.

The energy consumption of Bitcoin has drawn the attention of policymakers and grid planners, who are concerned about its impact on cost, reliability, and emissions. The dynamic nature of the crypto market and the rapid movement of mining assets to areas with lower electricity prices further complicate the issue. Additionally, the price volatility of Bitcoin affects the energy sources used, as miners may be more likely to seek out cheaper, non-renewable energy sources when prices are low.

To address these concerns, there have been efforts to decarbonize the crypto industry and promote the use of renewable energy sources for Bitcoin mining. The Crypto Climate Accord (CCA) is one such initiative, aiming to decarbonize the cryptocurrency and blockchain industry through collaborative solutions. Additionally, some organizations support the Change the Code, Not the Climate campaign, which encourages Bitcoin to move towards a less energy-intensive consensus mechanism.

While Bitcoin's energy consumption poses significant challenges, it is important to note that the estimates and calculations related to its energy usage are complex and subject to uncertainties. The Cambridge Bitcoin Electricity Consumption Index (CBECI) provides estimates of power demand for Bitcoin mining, with a wide range of lower and upper bounds.

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