The KPMG report around Bitcoin’s role in the ESG imperative is beyond absurd
A report by KPMG is currently making the rounds on LinkedIn that tries to achieve something extraordinary: Talking about Bitcoin’s role in the ESG imperative in a positive way.
TLDR: The report provides some harebrained talking points to help KPMG clients greenwash the bad crypto assets off their environmental reports.
Slide 2: The Introduction
The report starts off strong by claiming how Bitcoins “maturity into a traditional asset class is evident.” Sure, besides the price crashing from around $60k in 2021 to around $30k today, the number of active wallets having gone down from around a million in 2021 to 800k today, and a lack of liquidity in the ecosystem, it’s going great!
The report also praises how “there’s a variety of impactful use cases that Bitcoin offers that have a track record in delivering value for their users and society at-large.”
No.
Bitcoin has only one use-case: It’s an unregulated, unbacked, volatile speculative financial asset. A Bitcoin token doesn’t do anything. It has no economic activity associated with it. If you own one, the only thing you can do with it (besides looking at it) is to sell it.
However, the entire system is volatile by design and since a Bitcoin token isn’t backed by anything or anybody, the only money in the system is what people put into it. That means: For somebody to make a profit with Bitcoin, somebody else needs to lose money. It’s a casino. I have no idea how this is “creating value for users and society at-large”, but maybe the rest of the report will enlighten us.
(Spoiler: It won’t)
Slide 3: A tale of bad comparisons
Through some mental gymnastics the report is trying to convince us that Bitcoin doesn’t really have Scope 1 emissions, since the hardware running in the data centers is only using electricity! Which is funny because on the same page they list “Air conditioning” as another major contributor to CO2 emissions, but oh well.
They do however concede that “Bitcoin consumes approximately 110 TWh of energy per year, roughly 0.55% of the global electricity use.” But don’t worry! Having a carbon footprint comparable to the entire country of Morocco isn’t really a problem because other things are producing a lot of CO2 emissions as well!
The issue here is that the report compares absolute consumption with relative value. Let’s look at the two smallest visualized bubbles in Exhibit 1, which compares the MtCO2e of a couple of things.
Bitcoin emits 67 MtCO2e to execute a theoretical maximum of 600.000 transactions per day for a total of 800.000 people. The average is more like 400.000 transactions per day. Yes, Bitcoin does absurdly little for the enormous power consumption.
The visualization then shows that all data centers worldwide emit 127 MtCO2e to run the entire Internet for 5.3 billion people—social media, news, video, gaming, e-commerce, everything.
Let me repeat that: Bitcoin runs 800.000 transactions over 2 days and creates the same number of emissions as running the entire Internet for a day.
In other news, my little Fiat Punto also requires less energy than a high-speed train, but weirdly the train is way more efficient in transporting people.
Slide 5: Misunderstanding economics
This slide also starts with a good overview of the situation: Bitcoin mining is based on specialized hardware (ASICS). Since everybody with enough money has access to that, the only differentiator for a Bitcoin mining business is the price of energy to run the hardware.
The authors then look at green energy sources like wind, hydro and solar, which have variable output, sometimes leading to cheap energy due to energy surplus spikes. Great, so why not use that for Bitcoin?
Because Bitcoin mining operations only make sense if they run 24/7.
Since the initial investment for the specialized hardware is high, and margins for miners are razor thin (especially since the Bitcoin price crashed), keeping hardware offline that very quickly becomes obsolete is not a clever idea. This has been tried in Texas and some other places and it didn’t turn out well. In actuality, the use of renewable energy in Bitcoin mining dropped from an average of 42% in 2020 to 25% in August 2021.
The entire mining business is an exercise in economies of scale and a Red Queen’s Race. Currently two mining pools control over 50% of the hash rate, with the top four controlling more than 75%. To think that temporary mining based on renewable energy surplus can be in any form profitable given the required investments is just delusional.
Slide 6 -10: More bad ideas & hallucinating some benefits
I just can’t. Let’s make this quick:
- Strategy 2 to “reduce Bitcoins carbon footprint” is the reverse Uno card of strategy 1: “If the energy grid does not have capacity, just turn off the mining rigs!”
They even bring up the example of miners in Texas needing to shut down their operation, because I guess it’s great for miners not to make money and watch their equipment go obsolete? - Strategy 3 is a fun one, talking about using the heat generated from Bitcoin mining data centers to heat homes, commercial buildings, pools and so on. Except, houses, commercial buildings and pools are usually located in cities, which are areas with high energy costs and thus undesirable for miners.
They point to a Canadian company that claims to use this solution in North Vancouver. However, nothing really happened with that project since the press release in 2021, except some promises in 2022 that this will “really, really happen at some point, please?” - Strategy 4 is more of the same, only replacing “renewable energy” with “vented methane”.
- Social benefit 01: No, Bitcoin is not a good vehicle for remittances due to its volatility and high transaction costs. Even the examples given are bad. I mean, El Salvador? Seriously?
- Social benefit 02: Yes, donations in crypto for Ukraine are a thing, but why? Ukraine is not cut off from the global financial system and most crypto was immediately exchanged for Euros — with high transfer costs.
And if you now point to Russia, are you really arguing that breaking global financial embargoes is a good thing? Then again, North Korea loves Bitcoin! - Social benefit 03: Financially struggling energy providers won’t magically be profitable just because they mine Bitcoin during power surplus. Otherwise, they would already be full-time miners.
- Social benefit 04: xkcd: Security
Slide 11: Missing the point extremely hard
The report closes by praising Bitcoins “governance” and that no individual or group can make changes to the protocol. It even cites the block wars as a positive example.
This, however, totally misunderstands what the block wars were about. Sure, you can argue the technical side, but the simple question was: “Do we increase the throughput of the Bitcoin network?”
The miners simply said: “No!” since transaction fees are auctions. Users competing for a limited number of transactions drives up the fees and thus revenue for the miners. And since Bitcoin mining is highly centralized there was nothing the community could do about it.
Look, making Bitcoin more energy efficient and thus reducing the carbon footprint is amazingly easy: Change the consensus algorithm.
You could completely replace the wasteful consensus algorithm with something else, just like Ethereum did, saving 99.98% of emissions.
Or you could make the current algorithm more egalitarian and efficient by changing it to something that is ASIC and scale resistant — thus not requiring large initial cost and making sure everyone can participate in mining again for lower costs and lower emissions.
But the miners won’t do it because it kills their income. Thank you, Bitcoin governance!
Slide 12: Conclusion
No, Bitcoin does not provide any benefits across an ESG framework. The entire notion is absurd. It’s a volatile unbacked and unregulated speculative financial asset that consumes an appalling amount of energy for very little output. And it’s not early either since Bitcoin has been around for about 15 years.
This whole report is one giant hallucination to make companies having Bitcoin in their portfolio feel better. And to give the finance department something, anything, that they can show to their ESG departments to get them to stop screaming.
(Spoiler: They won’t)
The whole argument of the report is “Look, we know Bitcoin is really wasteful, but here are some ideas to make it seem a little less so.” Which makes the entire report about as sensible as announcing that your company is only wasting a lot of organic food instead of processed food.
The best way to “help stabilize energy grids and reduce greenhouse gas emissions” is to get Bitcoin off your books and not touch it again. Problem solved, sustainably.