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We begin this Sunday Digest with a quick notice… Our offices will be closed tomorrow in honor of Memorial Day. On that note, a huge “thank you” to all of our nation’s service members. Given the market holiday, we’ll be taking the day off here in the Digest. We’ll pick back up on Tuesday. If you need any help from our Customer Service team, they will be glad to assist you on Tuesday as well when our offices reopen. Have a wonderful Memorial Day! Moving on to today’s Digest… Bitcoin investors have recently experienced the wrath of Elon Musk. Specifically, his comments and tweets about the crypto world have tanked prices (to be fair, they have also boosted prices before). Most recently, Musk’s decision to have Tesla no longer accept Bitcoin as payment sent Bitcoin’s price spiraling lower. What was his stated reasoning? The relationship between Bitcoin and fossil fuels. What exactly is Musk referring to, and how does it impact Bitcoin? That’s what our macro specialist, Eric Fry, will dive into today. It turns out, the crypto sector might be stepping on the toes of the green energy crowd. So, let’s find out just how big of a headwind this might be for crypto investors. I’ll let Eric take it from here. Have a wonderful holiday weekend, Jeff Remsburg |
Why Elon Musk Just Declared Bitcoin “Dirty Money”
By Eric Fry
Elon Musk just redefined the term “dirty money”… and the investment world may never be the same.
On May 12, the Tesla Inc. (TSLA) cofounder surprised lots of folks by tweeting:
Tesla has suspended vehicle purchases using Bitcoin. We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.
Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.
The Bitcoin price tumbled instantly after Musk’s tweet – falling from $54,800 to $46,000 in less than two hours. One week after Musk’s tweet, the Chinese government announced a Bitcoin ban of its own… and the embattled cryptocurrency tumbled as low as $30,000, before bouncing back toward $40,000.
Bitcoin is still reeling from these dual sucker punches. Perhaps it will recover its losses over the next few days, and then take another run toward its record high near $65,000.
But I suspect Bitcoin has suffered some serious reputational damage that cannot be easily undone. In all likelihood, that damage will spread like a contagion from the cryptocurrency markets into the stock market, especially the “ESG” sectors of the stock market.
Environmental, social, and governance, or ESG investing, is the newest version of “socially responsible” investing that attempts to “do well by doing good.” ESG strategies do not ignore traditional financial factors and metrics, but they emphasize three specific nonfinancial factors:
- The “environmental” analysis takes a look at a stock’s “greenness,” and how proactively that company is striving to integrate sustainable practices.
- The “social” analysis assesses both a company’s human resources practices on the inside, and its community impact efforts on the outside.
- The “governance” analysis examines a company’s management and board, in particular to determine if these leadership teams are aligning their interest with shareholders and implementing shareholder-friendly practices.
Although ESG investing does not explicitly include Bitcoin, the ESG community of investors has embraced the popular cryptocurrency as one of its own – to the extent that many ESG ETFs, funds, and private portfolios hold sizable Bitcoin allocations.
Prior to Musk’s tweet, Bitcoin seemed as pristine and antiseptic as a pharmaceutical clean room. Reputationally, the cryptocurrency brushed shoulders with environmentally fashion-forward technologies like electric vehicles, solar panels, wind turbines, and energy storage systems.
But not any longer.
ESG Investors May Abandon Bitcoin
Elon Musk “outed” Bitcoin’s true environmental identity as a less-than-clean currency. Because “mining” the cryptocurrency requires intensive computer calculations, the process is an energy hog. Worse, the energy intensity of each successive Bitcoin is exponentially greater than the preceding one.
Back in early February, researchers from Cambridge University published a widely ignored study that estimated Bitcoin’s annual energy consumption to be about 121 terawatt-hours (TWh) a year, which is close to the amount of energy Argentina consumes each year.
To be fair, Bitcoin mining is probably cleaner than gold mining. But that’s not the standard that really matters. Modern marvels like Bitcoin are supposed to be environmental marvels as well – not just incrementally less bad than other alternatives. They are not supposed to leave behind Sasquatch-sized carbon footprints.
Long term, Bitcoin enthusiasts might not trouble themselves with the cryptocurrency’s non-exemplary environmental profile. But ESG investors might. And the community of ESG investors is large and growing.
According to the 2020 trends report from the US SIF Foundation, which advocates for “sustainable and responsible” investing, U.S. assets under management using ESG strategies grew to a whopping $17.1 trillion last year – a 42% increase from $12 trillion at the beginning of 2018.
This rapidly growing hoard of ESG investors purports to care about environmental impacts. Therefore, if these investors are to remain true to their stated objectives, they cannot ignore Bitcoin’s adverse environmental impact.
Musk’s tweet eliminated that option.
When he publicly rebuked Bitcoin for its “insane” energy consumption, he fired a shot across the bow of the “SS Willful Ignorance.”
His tweet sent a warning that “green” or “sustainable” technologies must walk the walk, not simply talk the talk, if they are to gain widespread commercial adoption. And these technologies must walk the walk throughout their entire life cycle – from conception to exhaustion.
Consumers will demand it, even if ESG investors do not. As consumers become increasingly aware of which technologies utilize the most sustainable practices, they will take notice.
Commercial success – and, soon after that, investor success – will follow best practices.
As I pointed out in the April issue of my investment letter, Fry’s Investment Report:
The fact of the matter is that many green products aren’t as environmentally friendly as advertised.
This inconvenient truth hasn’t attracted widespread attention yet. But it will…and this truth will matter in ways that produce significant commercial impacts in the renewable energy marketplace… and significant opportunities for investors.
All else being equal, consumers will shun suboptimal environmental practices, like Hoovering up Argentina-sized volumes of energy to make cryptocurrency.
In other words, the “how” matters; not simply the “what.”
Yes, a Bitcoin sitting in your online wallet is fairly clean and green – but the process that brought that coin into existence wasn’t green at all. Musk’s tweet made that fact crystal clear. But in doing so, he may also have nudged Tesla into the spotlight of heightened environmental scrutiny.
Going Greener Could Mean More Profits
Increasingly, for example, the folks who buy the cars Elon Musk sells might demand to know a bit more about a Tesla’s environmental impact than previous EV buyers did.
These future consumers might no longer be content to know only that a moving Tesla Model X emits fewer greenhouse gases than a moving Cadillac Escalade. These folks might also want to understand how that Tesla arrived in their driveway.
How much energy did the production require? What sort of mines produced the raw battery metals? What sort of chemical process converted those metals into batteries? What happens to the EVs and the batteries at the end of their useful lives?
In other words, these exacting consumers might want to learn at least as much about the background of their EV as they would about a rescue dog.
After all, it isn’t easy being a green consumer, partly because no technology is perfectly green or sustainable. EVs provide an insightful case study.
For starters, producing an EV requires about twice as much energy as producing a traditional internal combustion engine vehicle. This differential results mostly from battery production, which uses a lot of energy to extract and refine metals like copper and nickel.
Even after an EV rolls off the showroom floor, it is only as green as the fuel that sends electricity to its charging station. A coal-fired power grid is obviously less green than a solar-powered one.
In Germany, for example, where about 40% of the energy mix is produced by coal, a midsized EV must put about 78,000 miles on its odometer before its carbon footprint would break even with a diesel car, and about 37,000 miles to match a gasoline-powered vehicle.
Based on these estimates, and on typical German driving behavior, the average EV would require about nine years to become greener than a diesel car.
Clearly, EVs are not “zero emission” vehicles in a real-world sense.
This fact does not mean that the world should ditch EVs and return completely to traditional vehicles. It simply demonstrates that no product or technology is perfectly green or sustainable.
The technologies that achieve and/or promote sustainability are a work in progress, as Musk’s rebuke of Bitcoin makes clear.
But Musk’s tweet was less a condemnation of Bitcoin than it was a clairvoyant vision. It revealed a glimpse of the future Musk foresees – one in which green technologies must be as sustainable as possible, if they are to attract optimal consumer demand and commercial success.
No imposters allowed… not even wildly popular cryptocurrencies.
For now, Musk’s perspective may be an outlier. But that’s not unusual for this forward-looking entrepreneur. Few other companies are likely to follow his lead… at least not immediately. But no longer can any cryptocurrency buyer or ESG investor plead ignorance about the environmental impact of Bitcoin mining.
Bitcoin is (somewhat) “dirty money.” It is an environmentally problematic asset class. That identity might not undermine its long-term popularity, but it might. The risk to Bitcoin’s value is probably not zero.
To succeed as investors, we must seek the best-of-breed companies and assets. In the world that lies ahead, best-of-breed will become increasingly synonymous with “best environmental practices.” In fact, “green investing” might simply become “investing.”
The trend is clear. Why not get out in front of it by favoring the fast-growing technologies and innovative companies that are moving the needle toward a sustainable future, rather than those that are moving it in the opposite direction?
Regards,
Eric Fry