Cryptocurrency for Socially Responsible Investors

Cryptocurrency has become quite the hot topic in the investment world over the last few years. What’s less known, however, are socially and environmentally conscious perspectives on this new technology. After many years of observation and reflection, Brady and James got together to weigh in with their thoughts.

First, when discussing cryptocurrency, we feel it’s important to distinguish between the product and the underlying technology. Blockchain is an internet-based technology that allows for open, secure, and decentralized recordkeeping. Let’s break that down:

  • “Open” means the technology is designed to be accessed by anyone, and no one needs to give or get permission to access it.
  • “Secure” means a properly-designed blockchain should be secure against theft and fraud—assuming its users are able to maintain the security of their own “private keys,” which are like passwords to access the blockchain.
  • “Decentralized” means no single entity can take control of a blockchain—and that includes major governments.

Because of these unique attributes, blockchains offer enormous possibilities for companies, society, and the future of the internet. For example, the trading of stocks, bonds and other investments, and the registration of land deeds, mortgages, and car titles could all theoretically migrate to blockchains someday, not to mention money itself. The possibility of transforming society through “digital ownership” of unique “digital assets” is what attracts large companies, governments, and individuals to stake their claim in this space.

Bitcoin and other cryptocurrencies are akin to products built on blockchain technology. A way to think about it is that blockchain is like the internet framework, and Bitcoin is like a website or app that’s built on top of that framework.

Most cryptocurrencies, or “cryptos” for short, are digital assets in the purest form—they are backed by nothing other than digitally-enforced scarcity. And because of that scarcity, they can have value. But the lack of backing is a major problem with thinking of them as an investment in the same category as stocks and bonds. Stocks are backed by the ownership of a real company and bonds are the promise of a government or other entity to pay the holder cash in the future. Cryptos are the ultimate speculative financial product because their value depends on nothing more or less than what the next person is willing to pay for them, which can be zero.

When crypto first burst onto the scene, enthusiasts described it using language that can be appealing to socially conscious investors. The possibility of money that could be accessed by underserved communities and shrink the pool of “unbanked” people speaks to social justice principles. The idea of a decentralized currency speaks to those who distrust government and giant banks. However, the reality of how crypto has developed over time leads us to a different conclusion, at least for the moment.

For one, it turns out that early blockchain products like Bitcoin burn a colossal amount of energy. In a sense, this is by design; computers create or “mine” bitcoin by performing extremely complex mathematical calculations which in turn collectively generate the security of the blockchain itself. Running these calculations on computers around-the-clock worldwide requires so much energy that Bitcoin has become a huge emitter of the climate-changing gas carbon dioxide—its energy use is comparable to a small country like Argentina, according to researchers from Cambridge University. What’s more, some entrepreneurs have even purchased mothballed, energy-inefficient power generation facilities just to burn fossil fuel and use the energy for bitcoin mining. Because of this, it’s hard to view bitcoin as anything other than an environmental catastrophe.

Fortunately, newer blockchains are evolving to become more energy efficient. For example, the second biggest blockchain, Ethereum, has ambitious plans to become significantly more energy efficient in the times ahead. An environmentally conscious movement within the crypto world is pushing for blockchain computers to use more renewable energy as well. We hope that over time, and with the appropriate political pressure, blockchain technology will address its energy inefficiency problem.

Secondly, let’s explore the question of social benefit. Surveys have found relatively high levels of racial diversity among crypto holders. Yet, instead of seeing less wealth disparity relative to the conventional financial system, we are seeing more—at least in Bitcoin, where 0.01% of Bitcoin holders control 27% of the bitcoin in circulation. We’ve read stories of people (including refugees) using cryptocurrency for cross-border payments instead of expensive services like Western Union. However, a bank or other financial institution is still needed to convert crypto to and from conventional cash. In addition, commissions on crypto transactions tend to be high relative to traditional financial transactions. This leads us to believe that the assertion that crypto will supersede our current financial system is far-fetched for now.

The open, decentralized nature of blockchain technology that makes it impossible for a government to manage also makes it impossible for a government to regulate using technological means. In the regulated world of stocks and bonds, for example, financial disclosure requirements promote fairness and transparency, and regulatory supervision of exchanges provides for safe and orderly markets through close government oversight. None of this applies to crypto. As a result, crypto has become the payment system of choice for hacker ransoms and online drug deals. What’s more: though properly designed blockchain technology is itself secure, we have seen many examples of individuals and companies failing to properly secure their blockchain private keys (i.e., passwords) and having their crypto stolen by hackers. In the “Wild West” world of crypto, this is not a trivial concern and typically requires a high degree of technological proficiency. Serious crypto investors must ask themselves if they have that proficiency and are able to outsmart hackers and crypto thieves.

In crypto, as in previous investment bubbles, many alluring stories have been told about people who have made staggering fortunes. Now, we are increasingly hearing about people who have lost significant sums of their money through crashing crypto values and theft. Many were lured in by the hype and were not aware of the real risks associated with crypto. We believe that anyone choosing to invest in crypto should carefully educate themselves and consider different perspectives before proceeding. As with any risky investment, only invest amounts you can afford to lose.

 

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James Frazier

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