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A “disastrous direction of travel”: Why bitcoin is now on a collision course with ESG

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The soaring price of bitcoin is putting the world’s foremost cryptocurrency on a direct collision course with ESG-focused investments, as allocators increasingly want portfolios to be managed responsibly, says Robert Furdak, chief investment officer for ESG at Man Group.

The two major investment trends looming large over the hedge fund and asset management world – bitcoin’s stratospheric surge and investors’ rush towards responsible investing across all mandates – are now set for a “head-on clash”, Furdak said.

Hedge funds are continuing to profit from the ongoing surge in the cryptocurrency sector, as more managers pour money into digital assets’ record rise this year. At the same time, though, an increasingly large number of investors are calling for hedge funds to take a sustainability-based stance and implement ESG-compliant factors in their portfolios.

In an in-depth market commentary this week, Furdak – ESG CIO at London-listed global hedge fund and alternative investments giant Man – explored how bitcoin is already bumping against the range of environmental, social and governance factors that investors increasingly look for in their allocations.

On the environmental theme, Furdak noted how bitcoin mining will continue to require substantial energy consumption for as long as the digital currency’s price remains high, both in absolute and relative terms. He added that the majority of bitcoin mining takes place in south-east Asia, where coal-fired power stations remain dominant.

“Currently, one bitcoin transaction requires the same energy as processing 500,000 Visa transactions,” Furdak observed, highlighting a study by the University of Cambridge’s Centre for Alternative Finance which estimated that bitcoin mining energy now exceeds the annual consumption of countries such as the Netherlands and the United Arab Emirates, and is approaching that of Norway and Pakistan.

“The direction of travel is a disastrous one,” he added. “Either the energy consumption increases with severe environmental consequences, or the bitcoin price collapses – which helps the environment but undermines the case as a good investment.”

Furdak’s commentary also explored the social consequences of trading bitcoin, which he considers less stable and “significantly more volatile” than traditional investor safe havens such as gold, bonds or the Swiss franc. Unlike commodities or precious metals, he maintains bitcoin ultimately has “no intrinsic value.”

“If there is little fundamental justification for institutional investors to hold bitcoin, the cottage industry of encouraging retail investors to bet on cryptocurrencies can have even less justification,” he said, citing advertisements which offer bitcoin trading with up to 100x leverage directly to retail investors.

“This kind of promotion is irresponsible to the point of immoral,” he added. “Whether or not bitcoin does become mainstream, at this point in time it remains a speculative investment. And history tells us the bursting of bubbles almost always has consequences, with late-joining retail almost always hit the hardest.”

The note also flagged up governance concerns within the cryptocurrency, which Furdak described as “pseudo-anonymous.”

“A lax regulatory and enforcement framework makes bitcoin attractive to those who would avoid the network of regulations and sanctions that govern orthodox currencies and financial markets,” Furdak contended.

He also pointed to the vulnerability of bitcoin wallets to hacking, as well as a lack of enforcement surrounding transactions, various clearing issues, and data protection and privacy concerns stemming from its reliance on public ledgers.

“Bitcoin’s energy consumption is well-known to investors. However, concerns about its deleterious social consequences and poor governance protocols may have fallen off the radar,” he added. “One possible solution to these issues is a path taken by responsible investors in public markets: engagement. However, for now, the ESG and cryptocurrency megatrends are heading for a collision course.”

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