The Chinese government’s stunning moves to oust crypto miners, ban the use and trading of cryptocurrencies, and even target off-shore exchanges still catering to its citizens was a big deal indeed in blockchain-based investing. But it may actually provide a well-timed reset for a burgeoning business facing increasing blowback over environmental and other impacts.
Investors are understandably dismayed that the world’s biggest market for miners, startups, capital, and ancillary crypto businesses has been turned upside down (with regulators at the other biggest market, the United States, also murmuring concerning things). But it’s a good time for the rest of us to re-evaluate how we’re going about our involvement in a promising but complicated sector.
One of the most problematic critiques of cryptocurrencies has been the environmental impacts of running racks of electricity-devouring servers to mine Bitcoin and most other cryptocurrencies, and then verify ledger transactions. Indeed, some in the market believe crypto opponents have purposely pushed the critiques to undermine the sector and protect the status quo.
But in an era of increasing red-light warnings about the calamitous effects of climate change, talking about The Man’s conspiracies ignores the very real problems that “traditional” cryptocurrencies can’t quite distance themselves from.
Cryptocurrencies and crypto mining are tied to other substantial environmental impacts, though it’s useful to note many other technologies — from email to streaming video to e-commerce and ride-sharing/delivery services — cause just as many problems. Making high-end computer chips that power all these technologies, for instance, requires expensive and “dirty” rare earth minerals, substantial water usage, and a complicated waste-disposal trail.
But crypto is particularly vulnerable to criticism about its staggering appetite for electricity. China’s crypto-bans freed up the equivalent of Finland’s electricity usage. Before the ban, Chinese miners typically migrated between areas served by clean hydro-power and dirty coal-fired plants, leveraging seasonal price swings in power costs, but also driving up power demand and dirty air.
That seasonal migration points to one of many questions underlying crypto environmental impacts: where do you get your electrical power? Some sources are better for the environment, and maybe should be emphasized more.
For instance, El Salvador’s President Nayib Bukele boosted cryptocurrency prices recently when he showcased a geothermal-powered bitcoin mining operation installed on the rump of a volcano. Bukele, the self-proclaimed “coolest dictator in the world,” has also made bitcoin legal tender in the country, a first worldwide.
Meanwhile, Miami, Fla., Mayor Francis X. Suarez — a big booster of sustainable tech in a city deeply threatened by rising oceans — touted the potential of the area’s nuclear power plant for low-cost, low-impact power for crypto mining. Suarez made a similar pitch in June to displaced Chinese miners.
Using cleaner power sources such as hydro, geothermal and nuclear (excepting nuclear’s unsolved waste-disposal issues) are ways to reduce the cost and impacts of “traditional” crypto mining.
Environmental sustainability is certainly a key pitch for companies such as publicly traded BitFarms Ltd., which relies on cheap hydro energy agreements in Quebec, Canada to undergird its bitcoin cost structures.
But the better opportunity for investors is looking beyond cryptocurrency mining. For one, consider the diverse new ways to create and operate some cryptocurrencies.
The coming shift from “proof of work” to “proof of stake” in ethereum, for instance, has big implications for its power demand, and for the many technologies built on ETH. Proof of stake is a better mechanism than proof of work that I expect over time will gain momentum and become the de facto approach to those mechanisms.
I’m also a big fan of the potential for smart contracts built on ethereum’s backbone. Other tokens have gone even further, their creators structuring them from the ground up to be more environmentally friendly.
But there are competing ideas about how to structure tokens. I spend a few hours a week just learning about new tokens, and how their creators are creating more efficiencies, whether it’s focused on power usage, “gas,” time, or some other metric. We’re still in early days, though, which makes it very difficult to know what things will look like a decade from now, what I would call the very long term for this sector.
That makes me cautious. My philosophy is try to not be speculative. I’m bullish on crypto and DeFi in the long term, but to tie up a bunch of my wealth in that doesn’t make a lot of sense right now.
Instead, I generally suggest looking elsewhere on the value chain beyond the high-stakes, high-speculation world of tokens.
I also try to remember the history of green investing and how it has evolved. When it first hit the market early this century, lots of good intentions didn’t add to good, sustainable investments. These days, the approach has moderated and matured, and is far more widely embraced.
Now we call it ESG (for Environmental, Social and Governance) investing, focusing on those moral and sustainable components of our investment choices. Lots of family offices, ETFs and venture firms are embracing ESG in their decision making.
Accordingly, if you’re an early-stage company, how are you positioning yourself for this movement? It’s only going to continue to grow as a movement, and shape the flow of investment capital. In similar fashion, three years ago, diversity wasn’t the topic that it is today. Now everyone has a diversity program. People are becoming more aware and building companies that embrace these shifts.
We see it play out in investment support for ventures like SoftWear Automation, a robotics textile firm I’ve invested in that can eliminate slave/child labor and save water and cloth, among other important advancements. As an investor in the blockchain economy, you can similarly look for the companies riding the opportunities in ESG, diversity and similar major and likely long-lived trends. In the long run, those companies will be better positioned for success, and further investment.
There’s no crystal ball in crypto or any other investment sector. You need patience, awareness, and a thoughtful, educated, big-picture understanding of what’s happening in a sector.
Over time, if you’re paying attention to companies and markets, you’ll start to see patterns and opportunities. You can’t control big shifts like the Chinese government’s crypto decisions, or that Evergrande real-estate mess. But you can understand what broader market needs should be addressed, and find companies being smart about answering those market needs
Shifting from a speculative, eureka approach to blockchain investing to one that thinks about the bigger picture will ensure that the blockchain sector is built around and survives for the long haul too. And that’s the best investment strategy there is.