The fiat system and its centralised issuance of currency have allowed the issuers to create money at will, but when you’re creating money, you need to have a palatable reason that the public will accept; after all, you are devaluing their purchasing power. While there are many programs today justifying new money creation and investment, there is none more popular than the so-called “green economy.”
Where investors forgo the idea of investing in companies solely for their market efficiencies but rather for their possible impact on the climate, and boy, has it taken hold. This idea of investing in green companies and initiatives has become a multi-trillion-dollar market.
Green investors are those who invest in companies and assets that are considered to be “environmentally friendly”. They are typically motivated by a desire to reduce their environmental impact and to support sustainable businesses, or so they claim, since none of this so-called “impact” can really be measured.
Bitcoin mining meets the greens.
Bitcoin has been the best-performing asset of the last decade, and as it continues to provide returns and grow in size to allow bigger players to move in and out of it, more institutions are coming on board.
One of the ways institutions get involved in Bitcoin, other than owning the asset, is to secure equity in companies that mine Bitcoin on an industrial scale.
Bitcoin is created through a process called “mining.” Mining involves using computers to solve complex mathematical problems in order to verify transactions and add new blocks to the Bitcoin blockchain. This process requires a significant amount of energy as miners compete with one another from around the world. Today Bitcoin mining consumes as much electricity as a small country, and environmentalists feel that this is not a viable use of energy.
While strides have been made to diversify Bitcoin’s energy footprint, the reality is Bitcoin doesn’t know or care where the energy comes from; once the electricity is generated, regardless of means, if it can power a miner and create hashes, it’s all good according to the protocol. Taking a moral stance on energy creation, distribution, and consumption is a human problem, not a Bitcoin problem.
Bitcoin mining is a ruthlessly capitalist market, as miners seek out the lowest cost of energy production they can find to increase their margins. If you’re going to introduce inefficiencies into your mining operation, such as using unreliable like wind and solar, you won’t be able to compete with those using reliable energy production at scale.
Sure, wind and solar have their place in the Bitcoin mining market, but it’s a niche, such as completing mini-grids, not a replacement. Bitcoin will never run on only renewables unless these energy sources are the cheapest and most reliable; that is not a reflection on Bitcoin but on the reality of the technology used to source energy from so-called renewable sources.
Since Bitcoin mining still has this stigma of boiling the oceans, it hasn’t been attractive to certain investors, with much of the “green” funding sat on the sidelines and a few companies focusing on what is dubbed green mining, such as:
- Flaired gas mining
- Solar and wind farm mining
- Recycling tires to fuel miners
Despite these operations launching all over the world, investors are not always not keen to take a risk on a single operation, as picking a winner in this market is tough.
So how do you attract this type of capital into Bitcoin? Well, you could draw some inspiration from a popular green financial product called carbon tax credits and spin up your own derivative.
What Are Sustainable Bitcoin Certificates?
Sustainable Bitcoin Certificates (SBCs) are a new type of financial instrument that aims to make Bitcoin mining more sustainable. SBCs are issued to Bitcoin miners who use renewable energy sources or other sustainable practices. Miners can then sell their SBCs to investors who want to get exposure to Bitcoin mining but have green mandates meaning they need a carve out they can point to as investable,
Instead of seeking out individual miners that meet certain funds’ green criteria and purchasing Bitcoin from them or buying equity or buying debt of that business, the SBC will allow investors to invest in a pool of assets created by miners that the Sustainable Bitcoin Protocol has validated.
This might be more attractive than trying to guess which operations are going to make it through the next bull or bear market and act as a diversification tool for investors.
The SBCs are issued by the Sustainable Bitcoin Protocol (SBP), a non-profit organisation that was founded in 2022. The SBP has developed a methodology for assessing the sustainability of Bitcoin mining operations. This methodology takes into account factors such as the type of energy used, the location of the mining operation, and the miner’s environmental impact.
The SBCs are designed to provide investors with a way to support sustainable Bitcoin mining while also generating a financial return. The certificates are expected to be traded on exchanges, similar to other types of financial instruments, since the SBC will be a fungible token.
The first sale of an SBC was made over the counter; in the pilot transaction, each SBC was sold for $980. The deal was concluded between Bitcoin miner CleanSpark (CLSK), which primarily uses nuclear power in the U.S. state of Georgia, who sold their SBC to Melanion Digital.
Token issuance and management
How these tokens will be issued and traded has not been fully explained, nor how they will be traded on an open market. Will they only be available to trade with regulated exchanges that require KYC, or will users be able to custody of a token with a private key?
If so, the most likely route would be to issue an SBC as a security token offering on the Liquid Network, similar to the BMN, but it doesn’t have to be the only avenue.
SBCs could be:
- Minted using Ordinals
- Minted as Taproot assets
Allowing them to be transferred on chain or on a second-layer network between various exchanges but still using Bitcoin or Bitcoin-like rails.
Another method of issuing these SBCs would be to fork the Liquid Chain and create an SBP chain where all Bitcoin pegged into this chain meet the requirements set out by SBP and have all participants, such as miners, exchanges and institutions, become federated members that manage the peg in and peg out from the SBP chain.
The introduction of SBCs is a carbon credit-like tool to try and attract green capital into the development of the Bitcoin industry. It shows that there is a growing demand for exposure to Bitcoin and Bitcoin mining and that investors are willing to support this type of activity as long as it looks good on the books and for the PR.
SBCs could help to accelerate the growth of Bitcoin mining by pumping capital into the market that was previously limited from entering but with a new influx of capital comes market reactions.
How SBP would issue SBCs
SBP, Sustainable Bitcoin Protocol, is by no means part of the Bitcoin consensus; despite being called a protocol, it is not run by any nodes and is not part of the Bitcoin ecosystem in the way Bitcoin core is used to validate the chain and second layer protocols like Lightning are used to move funds outside the base chain.
SBP is centrally managed, and the token is centrally issued with reliance on 3rd parties to validate that SBP-compatible miners meet the requirements for issuance of SBC.
- To qualify for this additional asset issuance, miners would procure energy that is deemed “renewable” under the guidelines of the SBP and then apply for verification.
- Third-party providers then verify that coins mined by this operation meet the green energy requirements so that the miners can receive their issuance; since this is all completely arbitrary and cannot be enforced by the chain, this is all based on trust and reliant on humans to validate, there is room for corruption.
- Tokens are issued on a blockchain and sold to investors looking to acquire these SBCs as part of their investment strategy, providing an income for miners who wish to trade their allocation on the market.
Holders of SBCs have these tokens as proof that the Bitcoin they hold meets requirements set out by the SBP; it’s effectively an NFT tethered to a Bitcoin claiming that this Bitcoin is “green mined.”
One area of contention for SBCs is Bitcoin fees; when a Bitcoin block is mined, the block reward contains both the subsidy and the fees, but the fees are made up of Bitcoin that was previously mined with what could have been dirty coal.
- Do those fees get excluded and sold off?
- Do they get washed into the green pot and are now considered green?
- If a green coin is mined in future by a non-green miner, does it lose its status, or is it based only on when it was minted?
A subsidy for green miners
According to the documentation by SBP, active miners will earn 1 SBC for every 1 Bitcoin mined, while historical mining can also qualify for issuance of SBCs should they meet certain requirements. SBC is essentially an additional income stream for miners who use a certain energy mix and subscribe to be tracked and tagged by the protocol.
Under the model, miners can also gain SBC for free by fueling their operations with natural gas that would otherwise be wasted. The protocol may also invest in and retire other renewable energy credits to address the historical energy use of the network.
Investors could buy these to make ESG claims that their Bitcoin holdings are climate-friendly; they could buy them to speculate o this new market, as a diversification strategy or to offset certain non-green investments.
This additional income could allow miners to fund their operations through another revenue stream and reduce their need to sell coins on the open market; the fewer miners need to sell to fund operations or meet debt obligations, the fewer coins hitting the market. A situation that could see liquidity dry up and affect the price positively.
Misallocation of capital
The situation of a positive impact on the Bitcoin price is by no means a given. Depending on how large this market gets, it could see capital flow into this secondary market for SBCs instead of flowing into Bitcoin, reducing demand for the asset.
Additionally, it can create a misallocation of resources as green miners have a subsidy to fall back on to fund operations while fossil fuel miners are left to fight it out with only their Bitcoin income. Since there is no shortage of fiat and no shortage of fiat flowing into green projects, we could see so-called renewable miners grow way larger than they would organically, acquiring ASICS that would have gone to seek out cheaper power elsewhere.
If a large portion of the network is reliant on miners who use unreliable energy sources and subsidies from a secondary market, it could be an easy lever to pull to disrupt the network simply by cutting off these subsidies.
Attack on fungibility
In the fiat system, you don’t have oversight on how your credit card payments use energy or the energy mix of the paper currency in your wallet was created; coupled with the fact that it is government issued, they get a free pass when it comes to the climate.
Bitcoin is an open network which allows for the dissecting of where coins are coming from, so in theory, you could trace coins minted by green miners once they are issued through the block subsidy, should those miners be open to having their coins tracked and tagged and not CoinJoin them.
Suppose we do have a case where a large portion of coins are tagged as “green” for using renewable energy. In that case, market participants might want to own those coins as part of their portfolio, and these coins could trade at a premium when compared to coins that are not dubbed “green” by arbitrary standards.
Do your own research.
If you want to learn more about “sustainable” Bitcoin mining, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research, check out their official resources below or review other articles and videos tackling the topic.
Are you investing in the Bitcoin ecosystem?
Do you invest in bitcoin mining? Are you considering Bitcoin mining? Have you been mining for some time? How do you deal with the noise? Let us know in the comments down below.
