Ethical Considerations of Bitcoin Investing
Bitcoin investing has transitioned from the fringes to the mainstream, thanks to the advent of Bitcoin Exchange-Traded Funds (ETFs). Beyond financial risks, ethical considerations loom large. In this article, we explore key ethical considerations related to cryptocurrencies and Bitcoin, aiming to equip financial advisors (RIAs) with a checklist and provide a basis for meaningful discussions with investors.
This article covers six ethical dimensions of Bitcoin investing:
The environmental costs of Bitcoin
Facilitating illegal transactions
How Bitcoin investing impacts traditional assets
Differences between Bitcoin and currencies
Unique ethical considerations for American Bitcoin investors
Understanding the speculative risks of Bitcoin investing including market manipulation
The Environmental Costs of Bitcoin
Bitcoin mining consumes a significant amount of energy, leading to concerns about its environmental impact, especially if the electricity used comes from non-renewable sources. For some investors, these considerations alone may preclude owning Bitcoin investments in their portfolios. Key environmental implications related to supporting a network that requires high energy consumption include:
Energy Consumption: Bitcoin mining is notorious for its colossal energy consumption, raising alarms about its environmental footprint. The process consumes a considerable amount of electricity, particularly alarming if derived from non-renewable sources.
Greenhouse Gas Emissions: The energy-intensive nature of Bitcoin mining results in the emission of substantial greenhouse gases, notably carbon dioxide (CO2). To put it into perspective, Bitcoin mining alone contributes over eighty million tons of CO2 annually, equating its energy consumption to that of entire nations like Malaysia.
Water Usage: The environmental concerns extend beyond energy consumption. For example, Bitcoin mining also consumes vast quantities of fresh water, rivalling the total water usage of nations like Switzerland. This excessive water usage exacerbates concerns over resource depletion and ecological imbalance.
Electronic Waste: Another significant concern is the generation of electronic waste. The specialized hardware required for mining Bitcoin contributes to the creation of over ten thousand tons of electronic waste each year. This waste poses challenges for disposal and recycling, further exacerbating environmental degradation.
The Dark Side of Cryptocurrencies: Facilitating Illegal Transactions
Cryptocurrencies have become synonymous with anonymity, providing a breeding ground for illicit activities ranging from money laundering to cyberattacks. Cryptocurrencies serve as conduits for a plethora of illegal transactions, including but not limited to human trafficking, the drug trade, and cybercrime.
Anonymity and Illicit Activities: The anonymity afforded by cryptocurrencies makes them an attractive choice for criminals engaged in various illegal activities, such as money laundering, tax evasion, and terrorism financing. The decentralized and pseudonymous nature of transactions enables perpetrators to conceal their identities and evade law enforcement scrutiny.
Rising Threat of Cybercrime: The proliferation of ransomware attacks and cybercrimes poses a significant threat to critical infrastructure in the US and around the world, with cryptocurrencies serving as the preferred method of payment for extortion demands. Recent cases like Bitcoin Fog operator Roman Sterlingov's conviction highlight the role of cryptocurrencies in facilitating money laundering and aiding cybercriminals in covering their digital tracks.
Dark Web Marketplace: The dark web serves as a marketplace for a wide array of illicit goods and services, from illegal weapons and counterfeit currency to stolen personal information. Cryptocurrencies play a pivotal role in facilitating these transactions, providing a layer of anonymity for buyers and sellers alike.
Emergence of Cryptojacking: Cryptojacking is the unauthorized use of others' computers to mine cryptocurrency. It has emerged as a prevalent form of cybercrime. Hackers exploit vulnerabilities in computer systems to surreptitiously mine cryptocurrencies, further highlighting the illicit uses of digital currencies.
How Bitcoin Investing Impacts Traditional Assets
As Bitcoin investing increases, concerns arise regarding its potential diversion from ethical alternatives such as traditional stocks and bonds.
Impact on Traditional Investments: With investors allocating funds to Bitcoin or any other cryptocurrencies, there is a corresponding decrease in investments in traditional stocks and bonds. This shift affects the allocation of capital in financial markets, potentially disrupting the efficient funding of productive investments in innovation, physical, and human capital.
Ethical Considerations: Unlike investments in equities and bonds, which contribute directly to funding productive endeavors and societal development, the societal benefits of investing in cryptocurrencies appear minimal. Due to their decentralized nature, cryptocurrencies including Bitcoin do not directly contribute to job creation or the development of new technologies or products beyond the realm of Bitcoin mining and trading.
Risk Assessment for Investors: Investors should weigh the impact of cryptocurrency investment on their traditional investment portfolios. Understanding the potential trade-offs between investing in cryptocurrencies and supporting ethical alternatives is crucial for making informed investment decisions.
Differences between Bitcoin and International Currencies
It is important for investors to understand that cryptocurrencies including Bitcoin are not international currencies and are not likely to become or behave like currencies. Economists broadly identify at least four essential criteria for something to functions as a currency:
Stable value over the long-term
A stable issuer who guarantees the currency
Broad, global acceptance of the currency so that it can be exchanged for other assets of value (meaning, you use it buy things with it)
High trading volume, high liquidity, and low transaction costs around the world
Bitcoin exhibits significant price volatility, rendering it unreliable as a store of value over the long term. Unlike national currencies backed by a sovereign state with the ability to pay its debts by taxing its citizens, Bitcoin lacks a guarantor, undermining confidence in their stability and value.
With highly limited acceptance, there are only a handful of firms or financial institutions around the world that will convert your Bitcoin into another currency or sell you a good or service in Bitcoin.
In terms of scalability, Bitcoin is limited to twenty-one million units, thus it lacks the ability to scale and provide the volume and liquidity of an international currency. Additionally, its decentralized nature contributes to slower transaction processing compared to traditional currencies.
Unique Ethical Considerations for American Investors in Bitcoin
American investors have an additional factor to consider regarding the ethics of cryptocurrency investing. This stems from the fact that the U.S. dollar is the current standard for international transactions. As the global reserve currency, the dollar bestows unique advantages upon American citizens and investors.
Lower Borrowing Costs: The robust global demand for dollars enables the United States, American companies, and individuals to borrow money at more favorable rates. This cost advantage can significantly impact investment decisions.
Reduced Exchange-Rate Risk: By operating in dollars, U.S. firms and individuals mitigate the volatility associated with exchange rates. This stability enhances financial planning and risk management.
Investing in Bitcoin may help to increase its attractiveness as an alternative to the U.S. dollar, potentially risking some of these benefits in the future while offering rogue states an alternative avenue for global transactions, one that is illicit and operates outside regulatory oversight.
Understanding the Speculative Risks of Bitcoin Investing including Market Manipulation
The Bitcoin market is relatively young and much less regulated compared to traditional financial markets, making it susceptible to manipulation. While Bitcoin ETFs are regulated under the usual rules for ETFs, the underlying Bitcoin itself is far less regulated.
Bitcoin investing entails primarily speculation rather than investing on fundamentals. Price movements are heavily influenced by market sentiment, speculative behavior, momentum, and hype. Unlike traditional assets, like equities and bonds with tangible value (cash flows and dividends), Bitcoin has no intrinsic value, only a price. It is important for investors to recognize the speculative nature of Bitcoin and consider to what extent an allocation to Bitcoin is driven by short-term price movements or speculative trends.
Bitcoin market manipulation can take various forms including pump-and-dump schemes, spoofing (placing large orders with no intention to transact), wash trading (creating fake trading volume through large buys and sells), insider trading, and manipulative trading bots. Investors should consider the potential impact these fraudulent activities can have on their investments.
Summary
Financial advisors (RIAs) can address the ethical dimensions of Bitcoin investing when discussing Bitcoin with clients. In this article we discussed six dimensions that an advisor can use to structure such a conversation with clients: environmental impact, facilitating illicit activities, adverse impacts on traditional assets, Bitcoin should not be confused with a currency, unique adverse implications for American investors, and speculative risks and market manipulation.
About Markin Asset Management
Markin Asset Management is a diversified systematic manager that is active across alternative, multi-asset, and long-only equity strategies and funds. We seek to deliver outcomes that are aligned with the long-term goals of our investors. Our culture of combining quantitative and fundamental research, compute-intensive methods, and keenly focusing on the selection and management of risk exposures to enhance investor outcomes are distinguishing features of our firm. Markin is based in Rye, New York.
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