The Breakdown - Bitcoin Investing Is ESG Investing

Episode Date: February 26, 2021

In today's episode, NLW looks at how bitcoin fits with the growing trend of ESG (Environmental, Social, Governance) investing. In it, he:  Argues that ESG investors should disregard the false idea that bitcoin is only used for crime Provides three frameworks for understanding bitcoin’s energy consumption  Demonstrates how marginalized communities are using bitcoin as a tool of economic empowerment Argues that bitcoin provides a new, networked alternative to corporate governance 

Bitcoin offers a fundamentally different conception of governance. It is messy, socially driven and argumentative. It is also fundamentally democratic. It is already shown that when threatened by corporate capture, it can fight back and win. That potential alone, that Bitcoin can show a post-corporate power alternative, driven by beautiful, messy networks of real people and real stakeholders, should get investors interested in the G of ESG to at least, be paying attention.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, February 25th, and today we are talking about why Bitcoin investing is ESG investing. Now, before I start, I want to give the two sources of inspiration for this particular podcast. The first is kind of general. When we start new bull market cycles, there is inevitably a new wave of fear, uncertainty, and doubt that happens. The cynical side of this is that people who have

been against Bitcoin and crypto for perpetuity are re-upping and doubling down on their entrenched positions because otherwise they look stupid for having missed it. This is absolutely a thing I've mentioned it a number of times, but the non-cynical take, which is much more important, I think, is that there are, by definition, a lot of new people discovering Bitcoin as the price rises. It's not at all dismissive of all of Bitcoin's non-financial properties to recognize that number go up is just about the best marketing to get new people to pay attention. Certainly, I believe Satoshi recognize this. So if we take it from that angle, we have to assume that every new cycle brings new people, many of whom will naturally have questions, skepticism's reservations that they want to

address. That's a good faith conversation, and I'm here for it. So that's the general context. The more specific inspiration is a set of tweets from Rao Paul this morning. He wrote, Bitcoin Twitter, a bit of help needed. It appears that Bitcoin is not ESG-friendly is the narrative that I think was started at the ECB to slow institutional adoption and is now spreading to the media. I have a few institutional asset allocation committees reach out for clarification as they are concerned with ESG mandates versus their desire to own Bitcoin. I want to set them at ease that this is a false narrative. I know a few of you have looked at this, but is there a definitive article on the true cost or relative cost? Outside of the cost is very low to secure the blockchain, which doesn't really

help the institutions. I'm sure someone has done some great deeper analysis. Can you point me in the right direction to something that uses factual data references and analysis, etc. Something that will work for these institutions as I've got an inbox full. Now, I've been thinking about this topic basically forever, so I figured why not do the show? Last thing to note before we start is that I am not actually a Bitcoin person coming to ESG, environmental, social, and governance. In many ways, I am an ESG person that came to Bitcoin. In college, I started a series of programs to help students, learn how to make an effective impact abroad rather than just make an impact that made them feel good.

That ended up leading me to think about systems of impact in general, and notice that charity and philanthropy, while often very necessary, tend to be the cleanup of externalities of whatever the dominant economic and power system is. I started to think, why not focus then on changing the system that creates the externalities in the first place? That got me to start working with a company called Change.org when it was just five people, and I was entirely focused on this emerging area of social entrepreneurship, double and triple bottom line investing, basically the things that would become ESG later on. When I was first introduced to Bitcoin, it was actually exclusively in the context of a payment system, a competitor ironically to square,

and it in fact wasn't until I stopped thinking about it like that and instead started thinking about it as a tool for sovereign empowerment of communities that it really clicked for me. All of this is not to say that I'm some big ESG expert, but simply, to make it clear that this isn't a topic I've come to recently in some big desire to justify Bitcoin. With that said, of course, feel free to disagree as you will. But now let's discuss why Bitcoin investing is ESG investing. To do so, I want to go through each of these initials, the E, the S, and the G in that order. I do think before we do that, however, that we have to address the most commonly repeated critique of Bitcoin, which is that it's used for drugs, terrorism,

financing and crimes of all types. For someone who is in ESG and believes this to be the case, perhaps because it keeps being repeated by folks like Janet Yellen, it's going to get hard to get past this, so let's first address it head on. I have two key arguments on this front. The first is that US dollars are used in far more crime than Bitcoin, and that doesn't make us want to reject US dollars, and the second is that we actually know far more about Bitcoin than US dollars, and the evidence shows clearly that not only are illicit transactions a de minimis they are declining. Let's talk about that first piece first. Bitcoin is an investable asset that can also be used as a currency. The way the vast majority of institutions who are investing in it treat it is as an asset,

a store of value, an inflation hedge, albeit one that's still young in its life, has asymmetric upside potential. This is a reasonable stance given that the CFTC considers Bitcoin a commodity as well. However, it is simultaneously usable in a way that other commodities are not to exchange value global, with final real-time settlement. This makes it different. You can't buy anything from someone in Botswana with pork bellies. In terms of this use as a currency, there is inevitably going to be some part of exchange that is used for activities we don't like. But if we are looking at Bitcoin in this context, we should judge it akin to how we judge the U.S. dollar. In other words, we don't throw out the entire U.S. dollar system because some amount of dollars are used in illicit

activity. In 2019, CNBC wrote a piece called $100 bills in circulation soar to a record, hinting at a rise in global criminal activity. It included this line. Some say the surge in $100 bills in the past decade may be a sign that global corruption is alive and well. These high-denomination bills tend to be the currency of choice for criminals because there's no transaction record and total anonymity. Back here in the U.S., when someone pays for something in a Walmart with a $100 bill, we don't look at them like they're secretly in a drug cartel. We simply understand that there are externalities of a currency system. Indeed, the UN Office of Drugs and Crime estimates that between $800 billion and $2 trillion, 2 to 5% of global GDP, is laundered annually.

Bitcoin is an infinitesimal part of this, obviously, given that it's about two times the total market cap of Bitcoin. There can be a temptation, however, to say, but Bitcoin is even more opaque than cash, but that's actually not true. Bitcoin is anonymous, but highly transparent. The way the Bitcoin network prevents two people from claiming ownership of and spending the same Bitcoin at the same time is by making all transactions available to the entire network of nodes to see and to verify. This means that the tools we have to watch transactions across the global

network are actually radically more advanced than anything we have that monitors the flows of cash. Chainalysis does an annual report on crypto crime and found that in 2019, criminal activity represented 2.1% of all crypto transaction volume, roughly 21. $1.4 billion worth of transfers. In 2020, criminal share of crypto activity fell to just 0.34%, 10 billion in transaction volume. Of that, almost the entirety was criminal activity around scams versus the scary headline-popping stuff you hear about terrorism. Now, lest you think this company is just a crypto industry hack, chain analysis is actually a company that many in this industry have deep reservations about due to their deep ties to the U.S. government. In 2019, the company had

millions of dollars in revenue each from the FBI, ICE, and the IRS, and also worked with the CFTC and the DEA. The point is this. It turns out that the narrative that Bitcoin was for criminals is just that, a narrative, not borne out by reality. Now let's get into the stickiest of those ESG letters, the E. The energy cost of Bitcoin mining has been one of the most persistent long-term critiques of this space. In the context of this overall podcast, I can't go all the way into the depth that this topic deserves. Companies, I believe, that want to get into Bitcoin but have concerns around energy should of course dive all the way into all the resources available. What I want to do is point out three separate mental frameworks and lenses through which

to look at Bitcoin energy consumption that might help on that journey. The first is the most philosophical. Basically, we get to decide what is and isn't valuable to spend our energy on. To use a personal analogy, when you think about your allotment of time, what is value is to spend that time on isn't all valuable for the same reason. Work isn't valuable for the same reason that spending time with family is valuable, and spending time with family isn't valuable for the same reason that veging out and playing video games or watching a movie and cooking with a glass of wine is valuable. But they are all valuable, and indeed the substance of living a life is largely about making decisions day in and day out about what is valuable to spend

our time on. As societies, we get to have similar conversations about what is a value use of our energy and what is not. You've probably seen headlines along the lines of Bitcoin uses as much energy as CitiX or country Y. But did you know that Christmas lights in the U.S. consume about as much energy as El Salvador or Ethiopia use in a year? Does that mean we shouldn't put Christmas lights up? What about the U.S. military? If the U.S. military were a country, it would be between Peru and Portugal in terms of fuel purchasing. The scale of its emissions would be that of Romania. What does this say to us about the U.S. military system? And pertinently, the global petrodollars system that it supports. Does this mean we should abandon the

military or the dollar standard? The point is that these are value judgments, they're conversations about priorities. And given that, when it comes to Bitcoin, a big part of the energy consumption question should be, is the energy used worth it? In this way, it actually ties directly to the S and the G that we'll discuss. If you find the impact on a social or a governance dimension valuable, then it changes how you think about energy consumption in general. It of course also comes down to how valuable you find a global, permissionless, uncensurable real-time final settlement system. It's also worth noting here that part of why Bitcoin is an easy target is that its energy consumption, like its transactions, are far more transparent than other energy use

cases. This makes getting to those headlines a lot easier. So value judgments and the choices we get to make as a society are framework one for thinking about Bitcoin's energy consumption. Many investors want to be a part of the next bull run. Others seek to build their dream home, finally launch that startup or fund their education. Try Nexos instant crypto credit lines and borrow against any major cryptocurrency with no minimum or maximum withdrawal amounts, no fees whatsoever, no credit checks, and flexible repayment. Not to mention, the APR starts at just 5.9%. Stay on top of your investment game with nexo.io. And remember, It's your crypto, your credit, your choice.

Get started at nexo.io. Framework 2 is what type of energy is actually being used. There are numerous studies out there focused on what percentage of mining comes from renewable energy sources. In 2020, the third global crypto asset benchmarking study from the University of Cambridge found that 76% of crypto miners use electricity from renewables as part of their energy mix. Overall, 39% of total energy consumed came from renewables. This is a number that has been trending up. North American mining is particularly clean, with 63% of the energy consumed in mining

coming from renewable sources. In fact, it might be a reasonable strategy for companies interested in Bitcoin exposure and ESG to invest in those North American Bitcoin mining companies that are on the frontiers of how we use energy. Which gets us to Framework 3, which is perhaps the most exciting and least discussed in the media. It is about how Bitcoin is creating incentives and mechanisms to capture and use energy that would otherwise be lost

because it can't connect to the current grid. For this, I'm simply going to read a passage from Ross Stevens' 2020 Stone Ridge shareholder letter, which is one of the best short elucidations of this opportunity that I've ever seen. Bitcoin mining is the only profitable use of energy in human history that does not need to be located near human settlement to operate. The long-term implications of this are world-changing and hiding in plain sight.

Before Bitcoin, the problem of energy has never been its scarcity, but only our ability to channel it geographically where it is needed most. Before Bitcoin, that was exclusively where humans lived. In contrast, Bitcoin's mining energy is solving a different problem. Because of satellites and wireless internet connections, Bitcoin mining can be located anywhere. For example, remote-destitute areas blessed with moving water can monetize their natural resource good fortune by creating clean hydro energy and using it to mine Bitcoin. Thus, Bitcoin can make monetizable, isolated energy sources all over the world, like waterfalls, running rivers, or

createable dams, now entirely untapped because they would be cost prohibitive to connect to electric grids close enough to residual or industrial areas. In doing so, Bitcoin can fundamentally change the economics of energy by introducing a highly profitable use of electricity that's location independent. The world has never had a profitable use of energy that's location independent. Now it does. And since fossil fuels are already too expensive to be a profitable source of Bitcoin mining energy, I believe the only long-term profitable Bitcoin mining will be powered by hydro. Imagine a future with Bitcoin mining farms, unsubsidized in extraordinarily isolated locations, visualize a waterfall in a largely population-free part of an African country suffering from abject poverty,

easily connected to the Bitcoin network, building serious energy infrastructure to monetize the local clean energy source for mining. However, once the industrial strength profitable infrastructure is in place, let's extend it. Let's build roads and housing and schools and hospitals, ultimately leading to human settlement. The net result can be people locating around new Bitcoin-driven hydroelectric energy infrastructure with more and more of humanity clustering around cheap, clean energy sources. Historically, our energy challenge has been to move the power to the people. With Bitcoin, we can move the people to the power. Consider the world's major population centers, New York, London, Paris, Tokyo. Each developed where they are geographically because of natural

seaports, waterways, and trade routes. Energy was a non-factor because placement of these cities was all pre-energy, i.e. pre-fossil fuels. As Bitcoin finances the for-profit development of cheap, clean energy infrastructure on a massive scale, it can lead to a future in which more and more of the world's population lives near abundant energy with extraordinarily low marginal cost of production. This matters because cheap energy equals human flourishing. That's an equation. Cheap energy equals human flourishing. Beyond the revolution and monetary policy that Bitcoin already represents,

Bitcoin may also represent the biggest catalyst the world has ever known for developing abundant, clean, cheap energy. And therefore, one of the biggest catalysts in the world for human flourishing. The only thing I'll add to Ross here is that this isn't theoretical. It's happening and it's happening right now. Companies like Great American Mining are out there creating the mechanism to capture energy that would otherwise be lost. And so the point in summary is that when it comes to the E in ESG is not only is Bitcoin not as bad as you've been led to believe, it's actually creating a mechanism for a better system to be built.

Let's move on to the second letter, S, social. On this letter, we get a little more vague and a little wider to interpretation about what social values a company is supposed to have. Indeed, this is and will continue to be hotly debated. However, let's discuss it in this broad context. Bitcoin is a tool for economic empowerment for historically marginalized communities. Let's discuss the global first. In the U.S., we've been privileged to not have to deal with the scourge of rampant inflation. When it comes to the world, we are an exception, not the rule. If you were in Lebanon, for example, for the vast majority of the past 20 years, you could be confident that one U.S. dollar was worth 1,500 or so Lebanese pounds. Until that

peg started to break. When the peg started to break, it created bank runs, problem with imports, shortages, black currency markets, and more. Between September of 2019, when that peg started to break, and July 2020 in peak turmoil, the market went from about 1,515 Lebanese pounds per dollar to 9,700 Lebanese pounds per dollar. If you had, as so many Lebanese people did, their life savings in pounds, that life savings was now worth less than a sixth of what it was nine months earlier. This story is extreme but hardly isolated. Turkey, Argentina, Venezuela. These are all places where people who have worked hard their whole lives

wake up to see the value of their money evaporates seemingly overnight. In many of these places, I'm looking at you, Argentina, this has happened over and over again. There are also many parts of the world where money is subject to outright confiscation. The Human Rights Foundation estimates that more than 50% of the world's population currently lives under authoritarian rule. It is perhaps unsurprising then that that same human rights foundation is so convinced that the power of Bitcoin as a tool that allows people for the first time in human history to opt out of local monetary systems that leach their wealth and are used as tools of control and instead move into something that their rulers can't touch. But it is not just people living under global authoritarian rule that find Bitcoin appealing.

It is also historically marginalized communities right here in America. The history of this country is rife with examples of outright discrimination and banking practices followed by predatory institutions that fill in the gaps. Importantly, this is not something that magically went away with the Civil Rights Act or the Fair Housing Act or the Equal Credit Opportunity Act. A 2017 civil lawsuit alleged that Wells Fargo employees targeted undocumented immigrants to open accounts without consumers' knowledge and charged fees on accounts consumers didn't even know they had. They were fined millions and in 2018 also received a $1 billion fine related to all. auto insurance and mortgage lending practices. J.P. Morgan settled a $55 million lawsuit

alleging racial discrimination coming from lenders using varying mortgage rates that ended up higher for black and Latin customers. These same groups are less likely to have bank branches than other communities on average, and in these banking deserts you can count on payday lenders, check cashers, and the like to swoop in. These are just the tip of the iceberg of examples, and so is it any wonder that black America and marginalized communities are turning to a completely alternative system. Read Bitcoin and Black America by Isaiah Jackson as a starting point. Better yet, pop into the Black Bitcoin Billionaires Club on Clubhouse, one of the most booming communities on that emerging platform with tens of thousands of members that are growing every day.

This month, that community has partnered with Jack Dorsey and Cash App for Operation Satoshi Millionaire. As per their website, the campaign's objective is to educate black families about Bitcoin as a new asset class and the power of decentralization. We will also introduce them to channels to buy and store Bitcoin and provide them with their initial Satoshes via a simple user-friendly application, Cash App. Each Black family we connect with will own at least 1 million Satoshes, the smallest denomination of a Bitcoin by the end of Black History Month. Bitcoiners have often used the tagline, Be Your Own Bank. Many people who have had comfortable access to banking services just don't get that. Black Americans and other marginalized groups

absolutely do. In January, Ian Gaines wrote an essay called The Black Case for Bitcoin, and here's how it starts. We are in a moment. For the first time in history, Black Americans have direct access to generational wealth without needing to rely on the permission of an incumbent authority. Bitcoin and Black America are writing parallel stories, faded to complete the hero's journey on its highest difficulty level. Whether you locate your social interest at home or abroad, it is very clear that for those groups, Bitcoin means something more than just a way to get rich. So let's close out on the G, governance. In many ways, this is where Bitcoin is least comparable to other ESG investments, but potentially even more radically transformative. In short, Bitcoin

offers a completely different model to anything that exists. Despite creating a trillion dollars in value over the course of a decade, much more even when you consider all the business around it, Bitcoin has no CEO, no bylaws, no board of directors, no office, no marketing, no H.R. Bitcoin is not a company. It is a network. It is a network of miners who secure the network, a network of nodes who validate the integrity of transactions that flow through the system, a network of volunteer developers who keep the software running. And on that front, I'm recording this the day after Fedwire went down for hours, causing a shuddering of global economic flows. Bitcoin, despite being an entirely voluntary network, has run for 12 years with only two down times,

once in 2010 and once in 2013. In total, it has seen 99.986% uptime, and it hasn't been down for 2,908 days, while Fedwire has been down at least three times in the last two years. So why does it matter that Bitcoin is a network? One of the most important meta-shifts of the last few years is heroes crashing off their pedestals and leaders tumbling down mountains. Be it, bisexual sleaziness, financial corruption, or even more simply, the externalities of unfettered power,

we are questioning the way in which our institutions are designed and with good reason. Like I said, it's not just the me-toes and the outright criminals, it's also simply the realities that these institutions have gotten too powerful. When Twitter banned Donald Trump, Jack Dorsey, tweeted a thread. He wrote, Having to take these actions fragment the public conversation, they divide us, they limit the potential for clarification,

redemption and learning, and sets a precedent I feel is dangerous. The power in an individual or corporation has over a part of the global public conversation. The reason I have so much passion for Bitcoin is largely because of the model it demonstrates, a foundational internet technology that is not controlled or influenced by any single individual or entity. This is what the internet wants to be, and over time, more of it will be. He was saying, in effect, that there is a fundamental problem not just with these types of decisions, but with the very system that allows individuals and corporations to have the power to make those types of decisions in the first place. Bitcoin offers a fundamentally different conception of governance. It is messy, socially driven and argumentative. It is also

fundamentally democratic. It is already shown in its early life that when threatened by corporate capture, it can fight back and win. That potential alone, that Bitcoin can show a post-corporate power alternative, driven by beautiful, messy networks of real people and real stakeholders, should get investors interested in the G of ESG to at least be paying attention. And with that, I think I'll wrap. As I said, please consider this as a starting point to more individual research. My intention was certainly not to give you the absolutely comprehensive look at all of these highly complex issues, but I hope this provides some starting points, some ways of thinking, some different places to bring the conversation with the people you trust

and whose opinions you respect. Thanks as always for listening, and until tomorrow, be safe and take care of each other. Peace.