Carbon neutral bitcoin? New approach aims to help investors offset carbon emissions from BTC

Billion dollar companies around the world are betting big on Bitcoin ( BTC ). Recent analysis by European investment manager Nickel Digi...



Billion dollar companies around the world are betting big on Bitcoin (BTC). Recent analysis by European investment manager Nickel Digital Asset Management find that 20 publicly traded companies with a market capitalization of over $ 1,000 billion have around $ 9.6 billion invested in BTC. Retail investors are also increasingly interested in assets.

Grayscale Research’s “Third Annual Bitcoin Investor Study” found that demand for bitcoin has increased dramatically. According to the study, 55% of current Bitcoin investors started buying the asset within the past 12 months alone. Grayscale’s report also notes that the market for people interested in Bitcoin investment products grew to 59% in 2021, up from 55% in 2020 and just over a third in 2019, reflecting steady growth.

Yet, as the world’s enthusiasm for Bitcoin may increase, concerns about its environmental impact have become more apparent than ever. For example, Grayscale Research also found in its investor survey that over 30% of investors are concerned about Bitcoin’s potentially negative impact on the environment. Interestingly, this consideration only became apparent in 2021, as the report shows.

Models to calculate Bitcoin carbon emissions

With the growing distress over Bitcoin’s carbon footprint, new models are emerging that aim to help investors and businesses understand how to ensure the sustainability of their BTC holdings. For example, the Frankfurt School Blockchain Center and the digital asset manager INTAS.tech published a November 16 study describing a new approach to offset CO2 emissions caused by the Bitcoin network. The developed formula takes into account two approaches: a transaction-based approach and a property-based approach.

Philipp Sandner, professor at the Frankfurt School Blockchain Center, told Cointelegraph that asset managers and investors across Germany, in particular, are concerned that Bitcoin’s CO2 footprint meets environmental standards, social and governance (ESG). As such, Sandner explained that he wanted to create a formula that would allow asset managers, mining companies, stock exchanges and individuals to calculate the CO2 footprint of their BTC:

“Normally we put the highest CO2 offsetting burden on Bitcoin mining companies, but you still have ETF issuers, companies and exchanges that want to prove to clients that they are doing something about their CO2 footprint to offset their Bitcoin. ”

According to Sandner, the goal at the start of the study was to first calculate the global energy consumption of Bitcoin between September 1, 2020 and August 31, 2021. The results show that 0.08% of the global CO2 equivalent came from of Bitcoin. Based on that number, Sandner pointed out that maintaining the global Bitcoin network requires 37.97 million metric tons of CO2 equivalent.

In order to calculate Bitcoin’s carbon footprint from an investor perspective, the study notes that companies can either focus on the proportional use of the network in bytes versus the growth of the Bitcoin blockchain over a period of time. specific, or on the amount of Bitcoin held during a specific period. According to the document, an average Bitcoin transaction contains 670 bytes on the Bitcoin blockchain, representing an estimated carbon footprint of 369.49 kilograms of CO2 equivalent. Sandner explained:

“These carbon emissions can be offset by a certificate from the EU Emissions Trading System. A certificate for one ton of CO2 costs around $ 50, which would work out to about $ 18 to clear a single BTC transaction. Now, if an investor or a company held BTC over a period of one year, it would cost around two tonnes of carbon emissions. If it was offset by the EU Emissions Trading System, then that would amount to around $ 100. ”

Benjamin Schaub, senior consultant at INTAS.tech, told Cointelegraph that companies could apply the mentioned formula for Bitcoin transactions and ownership to calculate their carbon footprint which should then be offset. “What makes this model great is that all the necessary data is publicly available. There are no assumptions here, it is just a matter of how companies engage with the Bitcoin network. “

Schaub added that Iconic Holding GmbH, which offers products traded on stock exchanges in Germany, is currently applying this method to ensure sustainability: “We are also in discussions with some very large exchanges. I firmly believe that over the next year the major players in space will care more about this topic. “

While it’s difficult to predict the future, it’s worth noting that some major exchanges and exchange-traded funds (ETFs) have started to apply similar approaches to offsetting Bitcoin’s carbon footprint. For example, Schaub noted that the crypto exchange BitMEX tries to make its BTC holdings carbon neutral. According to a recent BitMEX Research blog post, the company believe that the most efficient way for users and exchanges to assess Bitcoin’s carbon footprint is through on-chain transaction fees. A BitMEX spokesperson told Cointelegraph that the company has concluded that every dollar spent on Bitcoin transaction fees can incentivize up to 0.001 metric tonnes of carbon emissions, according to the company’s formula.

There are currently only a few approaches available to help companies offset their Bitcoin carbon emissions, with Sandner commenting that transaction fees become higher as the Bitcoin network ages. As such, he believes that companies should consider a transaction-based approach when it comes to ensuring carbon neutrality.

Schaub further stressed that the source of electricity used should be taken into account, noting that the model developed by INTAS.tech and the Frankfurt School Blockchain Center examined the energy mix as applied in the United States and in Germany: “This ensures that we can observe that more and more miners are becoming aware of this topic and looking for electricity from renewable sources.

In addition to exchanges like BitMEX developing models to calculate Bitcoin carbon emissions, some ETFs are doing the same. For example, the Canadian Bitcoin ETF issuer Ninepoint Partners launched a carbon neutral Bitcoin ETF in May 2021. Alex Tapscott, managing director of digital assets at Ninepoint, told Cointelegraph that while it’s the right thing to do, it also benefits the company as a whole:

“Many investors with ESG requirements were concerned about Bitcoin’s footprint and stayed on the sidelines. We wanted to make it easier for them to be stakeholders and participate in the rise of Bitcoin. “

Tapscott added that often investors in Bitcoin funds, as well as the miners themselves, are the ones demanding that the industry be more sustainable. Given this, Tapscott estimates that in 10 years Bitcoin will be close to 100% renewable: “It may even help subsidize the development of renewable projects because it’s a raw, ready buyer that you can place at the source. In the meantime, carbon offsetting is a good way to bridge the gap.

How accurate are these models?

While it is becoming increasingly important for various companies to offset their Bitcoin carbon emissions, it is essential to recognize the challenges associated with the models discussed.

For example, Sandner noticed that all of the numbers compiled in the model he helped create change over time. “The hashrate is changing for example, as we saw recently with the Chinese mining ban. The hashrate has dropped by 50%. As a result, Sandner is aware that fluctuations in metrics need to be taken into account. He added that each country has a different mix of CO2 intense energy, noting that Norway tends to be greener than other regions. Finally, Sandner stressed that carbon prices need to be carefully observed, adding that prices have been increasing during December.

Related: Point of no return? Crypto investment products could be the key to mass adoption

Additionally, a BitMEX spokesperson mentioned that the company’s formula is not a perfect methodology, noting that the exchange awaits and welcomes criticism. However, the company believes the formula is improving compared to other estimates. According to the publication, the equation used is quite simple, as only the average Bitcoin prices are mined rather than the electricity cost estimates for Bitcoin mining.

Sandner ultimately believes that most of the work to be done is still to come, noting that most of these approaches are still emerging:

“The Bitcoin mining council in the United States, for example, is trying to find new models. Once these methods are developed, companies will have to adopt them, but it is still too early. Awareness is starting to emerge, but this is only the beginning.