Crypto & ESG: 2021 White Paper

Crypto & ESG 2021 White Paper - Sarson Funds Research Report

Crypto & ESG 2021 White Paper - Sarson Funds Research Report

The future of finance and investments leans toward sustainability and social responsibility. ESG investing, or Environmental, Social, and Governance-focused investing, aims to facilitate the marriage between corporations and a more sustainable, equitable world.

Otherwise known as Responsible Investing, ESG assets under management (AUM) made up one third of the total US-domiciled AUM by the end of 2020, and this measure is only growing. Rising in parallel, cryptocurrencies were the best performing asset class of the last decade and are strongly aligned with the ESG mission of sustainability, social-benefit, and community governance efforts.

Through the decentralized nature of cryptocurrencies and blockchain technology, the crypto ecosystem is taking cutting edge approaches to sustainability in order to achieve its mission of unifying the global economy with universally sovereign financial access. Together, ESG strategies and cryptocurrencies are equipped to build a more sustainable and equitable world.

Crafted by Portfolio Manager Blake Richman, Partner Marketing Manager Liam McDonald, and Blockchain Analyst Nathan Frankovitz, the Sarson Funds Crypto & ESG White Paper presents an in-depth overview of ESG, its impact on investment decisions, and its applicability in the cryptocurrency and digital asset market. Our aim is to provide the financial advising community with a credible source to better understand the power of crypto from both Wall Street and crypto experts.

Crypto ESG White Paper Sarson Funds Cryptocurrency Financial Advisor

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6 Reasons You Should Ask Your Financial Advisor About Crypto

6 Reasons You Should Ask Your Financial Advisor About Crypto

1. Crypto is the fastest growing asset class of the past decade

Crypto’s lexicon can be confusing to even seasoned investors, but the numbers are indisputable. More specifically, crypto is the best performing asset class of the last decade. Many successful investors have already broadly embraced crypto, and even long-time skeptics like Paul Tudor Jones, Mike Novogratz, and Kevin O’Leary are now embracing the asset class. 

A July 2021 Fidelity white paper cited growing institutional interest for the expanding set of channels offering crypto exposure. A recent Goldman Sachs report noted that while most family offices are not yet invested in cryptocurrencies, almost half are now considering ways to initiate exposure in the future. Banking giants Morgan Stanley, Goldman Sachs, and JP Morgan are now racing to compete with successful fintechs offering crypto like Robinhood, PayPal, Square, and Coinbase.

2. Millennials and Gen Z Have Already Embraced Crypto – And Boomers Will Need to Start Paying Attention

A Fall 2020 survey by Gemini revealed 42% of respondents holding crypto were between the ages of 18-34, while an additional 35% were ages 35-44. Goldman Sachs research suggests Millennials are one of the largest generations in history, and as such “are poised to reshape the economy; their unique experiences will change the ways we buy and sell, forcing companies to examine how they do business for decades to come.”

According to the latest CNBC Millionaire Survey almost 50% of millennial millionaires allocate 25% or more of their wealth to crypto. Meanwhile Gen Z is already calling Bitcoin “Boomercoin”, instead opting for even more contemporary digital assets. 

3. Crypto Is Disruptive

“Cryptocurrency” has become a misnomer as the market has diversified. Indeed most emerging crypto assets today seek to first offer utility rather than serving as a de facto currency. 

Decentralized Finance (DeFi) protocols on networks like Ethereum are disrupting private lending, borrowing, and market making services. Consumers can access these decentralized, unbiased services 24/7 without worrying about KYC (Know Your Customer). As DeFi matures, a diversity of use cases are being built, including asset fractionalization and parametric insurance. These innovations could profoundly change the real estate and insurance industries by lowering barriers to entry and removing opaque, unreliable intermediaries.

4. Crypto is Community and Culture

Blockchain technology is opening new pathways for artists and consumers to create, communicate, and transact. Audius’s decentralized music-streaming network is giving artists unrestricted creative license without need for costly and controlling middlemen, while Livepeer targets similar disruptive creation in the video streaming industry. Celebrities and sports teams are even tokenizing themselves to deepen fan engagement through issuing token-holder incentives like voting and rewards.

Burgeoning metaverses, play-to-earn games, and NFT (non-fungible token) collectibles/art markets are also fueling the fire of crypto adoption. NFTs offer users ownership of provably scarce digital assets, something previously impossible in earlier iterations of online communities. These new digital economies are processing $100 million + weekly trade volumes for assets such as metaverse real estate, in-game characters and items, and generative art.

5. Crypto is ESG

ESG investing saw exponential growth in the last decade, with relevant investments representing ~25% of all new capital invested in 2020, versus ~1% in 2014. Morningstar research suggests net new capital allocated to ESG offerings increased from ~$5 billion in 2015 to $51.1 billion by the end of 2020.

Crypto and ESG are already converging . Despite criticism for its high energy usage, Bitcoin’s appetite for low-cost electricity makes renewable energy opportunities profitable through energy arbitrage, and forward-thinking miners are collaborating to further address ESG concerns through initiatives like the Bitcoin Mining Council. Beyond Bitcoin, myriad token projects are gaining popularity as they seek to fulfill environmental, social, and governance-related issues through their efficient network economies and governance structures like DAOs.

6. Crypto could just be getting started

Despite its already immense appreciation, crypto’s potential remains largely untapped. Bitcoin alone could have over a ten-fold increase from its current ~$885 billion market cap before it fulfills its predominant narrative to surpass gold as a store of value. Beyond Bitcoin, DeFi applications built on protocols like Ethereum have hardly scratched the surface of the global derivatives markets, which some estimates place notional value between $558.5 trillion – $1.0 quadrillion (total crypto assets are currently valued at ~$2.15 trillion). 

Gemini’s same Fall 2020 survey estimated 14% crypto asset investment market penetration among U.S. adults. As Icon Ventures’ Michael Mullany points out, technological adoption begins to accelerate as early adopters give way to the early majority at ~15% market penetration. KPMG’s “Consumer Adoption: How to predict the tipping point” substantiates this idea, illustrated by the S-curve adoption model. However, discrepancies between U.S. and foreign adoption and inconsistent regulatory landscapes indeed make predicting an adoption “tipping point” difficult to estimate with precision.

As IBM suggests, crypto’s ability to broaden financial inclusivity by “banking the unbanked” is compelling. With billions of people worldwide yet to have access to meaningful internet connectivity, the maturing crypto asset industry could grow significantly by onboarding internet newcomers in the coming decade. El Salvador, the world’s first country to adopt Bitcoin as legal tender, already estimates it will save $400 million (~1.62% of their 2020 GDP) in remittance fees per year according to CNBC

As investor Naved Abdali once said, “It may take some time, but capital will eventually flow to the most logical place.”

 

A Special Announcement From Sarson Funds

On September 2nd, Sarson Funds announced the launch of its cryptocurrency financial advisor certification program, with the aim of making advisors “crypto heroes” to millions of American investor clients who have otherwise been dormant from the accelerated growth of digital assets. The eight-part webinar series will consist of live bi-weekly webinars hosted on the Digital Wealth News education portal, beginning on September 14th, 2021, and running to December 19th, 2021.

Key Takeaways:

  • Sarson Funds announced the launch of its cryptocurrency financial advisor certification program, hosted in partnership with the Investments and Wealth Institute and Digital Wealth News.
  • The eight-part webinar series will be comprised of live bi-weekly webinars hosted on the Digital Wealth News portal, from September 14th, 2021 to December 19th, 2021.
  • Advisors who complete the series will earn CE credits, plus certification as a crypto advisor from Sarson Funds, awarded as a non-fungible token (NFT) – an industry first.

To view the full announcement, including downloadable images, bios, and more, click here.

By Nathan Frankovitz & Bryan Prohm

 

“Green” Bitcoins: Environmentally Progressive, or an Empty Promise?

"Green" Bitcoins: Environmentally Progressive, or an Empty Promise?"Green" Bitcoins: Environmentally Progressive, or an Empty Promise?

Amid sustained bearish price action in the crypto markets, concerns surrounding Bitcoin’s energy usage remain pervasive. Prominent politicians, CEOs, and even comedians are taking both sides of the debate—often opting for controversy in lieu of objectivity. Notably, talks of assigning sustainability grades to individual bitcoins are gaining traction, threatening Bitcoin’s fungibility in an effort to address investors’ environmental concerns. However, the market’s appetite for graded bitcoins remains to be proven. Will demand for graded bitcoins sculpt the future of the network’s relationship with the environment, or will preexisting forces help Bitcoin stand the test of time? At Sarson Funds, our mission is to dive deep into issues like these to deliver fact-based, world-class investor education and portfolio management.

Last week, El Salvador made history as the first country to adopt Bitcoin as legal tender. The move is widely claimed by supporters to be aimed at improving financial inclusion for the ~70% of unbanked Salvadorians. Yet, days later, political figures like Donald Trump and Elizabeth Warren both denounced Bitcoin for fear of its competition with U.S. monetary policy and its impact on the climate. Adding to the confusion, prominent technologist and environmentalist Elon Musk recently made conflicting remarks both for and against Bitcoin’s case as a technology that hastens renewable energy development. Even Kevin O’Leary, who rejected Bitcoin for years as a “giant nothing-burger”, has reversed his stance and now loudly supports Bitcoin as an asset that will outperform the S&P 500 in the coming decade. 

O’Leary posits that greener practices will drive up institutional demand for Bitcoin. According to him, “Most of these institutions have both ethics and sustainability committees that filter offerings before they’re allocated on the investment committee. They’re not just singling out crypto.” A popular, generalized category of investment screening methods for these committees is called “ESG”, which stands for environmental, social, and governance. As ESG mandates gain adoption, entities seeking investment face growing incentives to fulfill ESG mandates.

To help ESG-focused institutions justify investing in Bitcoin, O’Leary is pushing to “wrap” bitcoins based on the alleged sustainability of their origin. Essentially, “wrapping” bitcoins on the blockchain would involve tagging them with varying grades depending on the energy mix of the mine they originated from. With the ability to verify the environmental sustainability of a given bitcoin’s origin, investors could theoretically invest in the leading crypto asset without contributing toward demand for environmentally destructive energy sources.

On the other hand, demand for wrapped “green” bitcoins is yet to be proven. To understand why, Anthony Pompliano interviewed CEO Fred Thiel of Marathon Digital Holdings, one of the largest Bitcoin miners in North America. Marathon responded to growing ESG demand by developing “virgin” OFAC compliant bitcoins mined with purely sustainable energy. However,  these bitcoins failed to garner investors. Thiel described the experience, stating, “What we quickly learned, however, was that the financial institutions weren’t willing to pay extra for that bitcoin. So it’s kind of like saying ‘all bitcoin really are the same, but we’d like to be able to say (this is the financial institutions) that the bitcoin we buy are sustainably mined and are fully OFAC compliant’. But if they [institutions] are not willing to pay for that, then there’s no reason to do it.” 

So, it seems that institutions are playing both sides. On one hand, they are buying Bitcoin at unprecedented rates. On the other, they want to continue attracting investors by fulfilling ESG mandates. As Thiel describes, “I think part of it is very much virtue signaling by the institutions because there are activist investors holding them to that mandate.” Thus, “green” bitcoins appear to be more of an advertisement than a technology.

Contrary to the narrative most media outlets are selling, we believe that Bitcoin and ESG will not only continue to coexist, but will actually continue to propel one another as complementary forces. Thiel continues, “Miners really have an incentive of becoming more environmentally sustainable. It’s the right thing to do, not just for the planet but for the industry.” In other words, the economic incentives underlying the Bitcoin network are aligned with sustainability as miners compete for increasingly low-cost energy.  Demonstrating this concept, Marathon has committed to carbon neutrality for their next deployment of 70,000 miners in accordance with their carbon neutrality objectives. 

Few understand how Bitcoin, its surrounding ecosystem of crypto assets like Ethereum, and the electrical grid interplay to impact the long-term outlook on the environment. Previously, we have cited research showing how demand for Bitcoin accelerates clean energy network expansion through an economic mechanism known as “energy arbitrage”. In his interview with Pomp, Thiel cites another example of this concept in practice:

The biggest problem in power today is not that there isn’t enough of it that’s green, it’s it can’t get to the right places. And that’s a grid and distribution issue. 200 gigawatts of power is lost a year in this country just by heat in distribution lines. And you could mine a lot of Bitcoin if you just put that base load on a facility where they’re doing solar or wind. And until battery storage technology gets there, I think you’re going to find Bitcoin miners are the key drivers of investment in renewable energy.” 

Published in September 2020, The 3rd Global Cryptoasset Benchmarking Study from the University of Cambridge cites that “on average 39% of proof-of-work mining is powered by renewable energy, primarily hydroelectric energy.” In comparison, renewable energy’s share of global electricity generation was only 25% in 2019. More recently, CEO Jiang Zhuoer of a leading Bitcoin mining pool called BTC.top claimed that miner clean energy usage now exceeds 50% in the aftermath of mining facilities in Xinjiang, Inner Mongolia, and Qinghai provinces being shut down.

Miners’ eagerness to bring transparency to their operations is a good sign. Recently convened by Microstrategy’s Michael Saylor, the Bitcoin Mining Council seeks to “…promote transparency, share best practices, and educate the public on the benefits of Bitcoin and Bitcoin mining.” Pursuant to these goals, the council will provide a voluntary disclosure forum for miners to share energy sources. Looking forward, Sarson Funds will closely monitor the council’s quarterly meetups to track trends in Bitcoin mining.

So long as individuals, institutions, and governments continue to embrace decentralization, we expect the increasingly informed public to view Bitcoin and other crypto assets as environmentally progressive technologies. In contrast to the perils of the petrodollar, we are optimistic about the future of states leveraging their climate’s unique mix of renewable energy sources like Iceland and El Salvador have. If DeFi applications continue to mature and take market share from legacy financial institutions, electrical demand for banks should diminish. If this idyllic vision is fully realized, the future of finance will be powered by a decentralized, transparent, and unbiased monetary system secured by sustainable resources worldwide. 

"Green" Bitcoins: Environmentally Progressive, or an Empty Promise?By Nathan Frankovitz

Crypto and ESG: Bitcoin’s Energy Consumption and the Future of Blockchain Sustainability

Crypto and Blockchain Sustainability Powers the future of ESG investing

Crypto and Blockchain Sustainability Powers the future of ESG investing

With critics questioning the viability of the crypto ecosystem after sustainability concerns raised by Elon Musk and others, Sarson Funds believes that crypto moves in stride with the future of sustainable finance and ESG investing. Contrary to popular opinion that Bitcoin and crypto assets are encouraging ill-spend of the global energy supply, this article will overview Bitcoin’s true energy usage next to traditional financial institutions, highlight the primary energy source of Bitcoin mining operations, and identify how the ecosystem is launching more scalable, energy efficient blockchains to spearhead the future of financial operations.

To begin, let’s consider the computations of Sarson Funds Chief Marketing Officer Jahon Jamali, who recently calculated the true energy usage of the entire traditional banking system next to Bitcoin’s singular decentralized network. Jamali derived this number by adding together 3 metrics: server, branch, and ATM costs, which he estimated to be an average of 140 terrawat-hours (TWh) per year to power its operations, while Bitcoin uses only 32.56 TWh per year. While 32.56 TWh beats the energy usage of the entire country of Norway, comparing these vastly different entities is like comparing apples and oranges. To measure Bitcoin’s energy usage in relation to a more comparable entity, it is only fair to size Bitcoin up against the system it is competing against: the global financial infrastructure. Traditional finance uses roughly 400% the energy that Bitcoin does, so while the Bitcoin network does use a substantial amount of energy, it pales in comparison to the system it aims to upend.

The next argument to tackle: Bitcoin and dirty energy. This past week, Bitcoin lost nearly 12% of its value when Elon Musk raised concerns that much of Bitcoin’s mining and transaction operations were sourced from fossil fuels. Musk commented on his concern for cryptocurrency’s adoption coming with environmental costs in a tweet this past Wednesday, stating “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.” While Musk’s concerns are valid regarding the use of dirty energy in some crypto mining, 76% of Bitcoin miners are using renewable energy to fuel their operations, according to Ark Investments in a recent CNBC “Closing Bell” interview. So, while Bitcoin may be using comparable amounts of energy as Norway, its carbon footprint is somewhere between half and a quarter, according to a Coinshares article on the environmental impact of Bitcoin mining.

Lastly, several blockchains have emerged in the past year that aim to construct a new horizon of sustainability for the crypto ecosystem. These blockchains have integrated Proof-of-Stake (PoS) block creation protocols, the sustainability-minded progression from Proof-of-Work (PoW) block validation, also known as mining, that powers the aggressive energy consumption of industry leaders like Bitcoin, Ethereum, and Litecoin. PoS protocols allow token holders with certain native token reserves to stake tokens, meaning that their own token holding allows them to validate blocks on the network and collect token rewards over time. Instead of miners using large quantities of energy to solve mathematical functions and unlock a block, Proof of Stake protocols randomly select one token staker to validate the next block and collect staking rewards, similar to how miners collect mining rewards. PoS protocols create competition among stakers by encouraging larger token holdings in order to increase the chances of a staker being selected as the next validator. Current industry leaders in PoS protocols are Ethereum, Polkadot, Cardano, Algorand, and CasperLabs. Large scale adoption of staking protocols will substantially relieve the crypto ecosystem from the environmental concerns related to the mining process, creating a pathway for crypto to be embraced on a global scale.

With these recent advancements, the crypto ecosystem is strengthening the longevity of the global financial system in an increasingly environmentally focused landscape. Crypto’s focus on energy efficient scalability is naturally building the blueprint for a sustainable financial future.

By Liam McDonald

Crypto, Climate, & Confusion: Clearing the Air on Blockchain and the Environment

Cryptocurrency Sustainability

Cryptocurrency Sustainability

Millennials lead other generations on investing in two hot topics: Crypto assets, and climate and energy issues. Yet, some still argue that these investments are diametrically opposed due to the Bitcoin network’s considerable electrical demand. As of March 18th, 2021, the annual power consumption of the Bitcoin network was estimated to be 129 terawatt-hours (TWh), a staggering figure when compared to the entire country of Norway, which consumes 124 tWH annually. 

Counterintuitively, however, this doesn’t mean Bitcoin has a negative net impact on the environment. Like warm and cold air forming a tornado in the Great Plains, a whirlwind of colliding hype and doubt is obscuring the facts underlying today’s crypto assets. Bill Maher went so far as to say, “Almost all the people who tout Bitcoin, the millennials, the Gen Zers, the Silicon Valley types, are money-hungry opportunists and you’re not allowed to pretend you care about the environment.” Strong words for someone who, just minutes earlier, admitted “I’ve read articles about cryptocurrency, I’ve had it explained to me, and I still don’t get it, and neither do you or anyone else.” Even Elon Musk seems conflicted, having taken actions for and against Bitcoin’s case for sustainability in the last month. 

Accordingly, we must keep an open yet critical mind as we explore the interplay of finance and energy globally. Tweets and talk shows are insufficient for developing informed opinions on such a complex topic. We suggest Bill reads up on our industry-leading research before completely dismissing the fastest growing trillion dollar industry on earth.

Harvard Business Review’s May 2020 article “How Much Energy Does Bitcoin Actually Consume?” makes an important distinction: “…you cannot extrapolate the associated carbon emissions without knowing the precise energy mix — that is, the makeup of different energy sources used by the computers mining Bitcoin.” In other words, not all energy consumption incurs equal costs to the environment. Bitcoin mining is a game of margins, with the price of electricity being the chief factor. These incentives are driving miners towards “…better access to sustainable and renewable energy”, according to Argo Blockchain. In fact, data illustrating cost-efficacy improvements in wind and solar explain the 11% reduction in U.S. energy-related emissions of CO2  in 2020. As demand for decentralized finance grows, crypto mining is actually accelerating renewable resource adoption. Props to General Electric for predicting this trend in 2016.

The economic mechanism by which Bitcoin demand accelerates clean energy integration can be referred to as “energy arbitrage”. Essentially, certain places at certain times are exceptionally efficient at producing clean energy—the trouble is that these regions’ demand for electricity don’t always match production. In west Texas, Layer1’s Bitcoin mining operation perfectly illustrates the power of arbitrage. Most of the time, Layer1’s miners are busy converting cheap west Texan energy into Bitcoin. However, pursuant to their “demand response” contracts, Layer1 will shut down their machines to allow their 100 mw load to flow into the electrical grid. CEO and co-founder Alex Liegl explains, “We act as an insurance underwriter for the energy grid.” Ed Hirs, a University of Houston lecturer in energy economics adds, “It’s a lot cheaper option than building a whole new power plant or battery system just to keep it on standby.”

This form of arbitrage is replicated globally. In Iceland, “…abundant water and underground heat is harnessed by hydroelectric dams and geothermal power stations to produce cheap, green electricity that facilitates the energy-intensive process of confirming cryptocurrency transactions”, according to wired.com. In Sichuan China, Bitcoin enables overbuilt hydroelectric operations to make use of excess energy, as explained by Coindesk’s Nic Carter. “If your local energy cost is effectively zero but you cannot sell your energy anywhere, the existence of a global buyer for energy is a godsend.” The existence of Bitcoin’s global market de-risks renewable energy development as investors seek optimal conditions on the edges of civilization. 

We must also consider the impetus for Bitcoin’s rapidly growing global market: demand for a decentralized financial system. Progress towards this vision has been considerable since the onset of the COVID-19 pandemic, which spurred unprecedented manipulation of the monetary supply by centralized banks. This begs the question: how energy intensive are the financial systems that currently exist which Bitcoin and its orbiting crypto assets show promise to replace?

Let’s begin with the predominant narrative on Bitcoin today: Bitcoin replaces gold as a store of value. A 2019 study by Arca demonstrates how “gold mining in terms of crude oil usage accounts for 0.27% of worldwide oil consumption (directly comparable to Bitcoin’s electricity share)”. This approximation of equal environmental costs comes before factoring in gold transportation, storage, etc., in addition to the energy mix concept previously addressed. It also doesn’t account for decentralized finance’s ability to replace enormous shares of the traditional financial systems which expend energy across countless verticals. Bank branches, capital expenditures, employee commutes, aluminum mining, currency smelting, distribution, custody, etc. are just a few of the ways the legacy financial system expends energy to uphold a far less egalitarian and convenient monetary system. By virtue of being more perfectly scarce, more durable, and easier to transport, Bitcoin’s “distributed ledger technology” reduces the friction associated with gold’s (and other financial instruments’) existing use cases while opening new possibilities through its composability in smart contracts. The resulting reduction in friction allows financial systems to scale, accelerating financial inclusion for the “unbanked” and “underbanked”, as described in Deloitte’s Inside magazine issue 19

Equalizing access to financial services is not only a moral imperative, but an economic interest for all global-minded citizens. Many governments around the world practice ineffective and even abusive monetary policies that stifle innovation, such as in Venezuela. As the Venezuelan bolivar collapses, people are investing in food and water and resorting to bartering to preserve their purchasing power. These ancient ways of storing and exchanging value are clearly inefficient, and regression towards their use robs people of their life savings, time, and humanity. As we progress towards an increasingly globalized world, the billions left behind under such tumultuous economic conditions have little chance of realizing their potential. As a result, we all suffer.

In 1999, Forbes published an article titled, “Dig more coal — the PCs are coming”. In retrospect, these old skepticisms seem absurd. Inevitably, disruptive technologies create fear, uncertainty, and doubt—especially among those who hold stake in the aging systems. Like JP Morgan in 2017, incumbents cry foul until they realize what’s happening. “If you can’t beat them, join them” would make a great title for a memoir of these times in which financial institutions are piling into the crypto universe.

At Sarson Funds, we are not dogmatic about crypto investments. Our role is to provide evidence-based educational content on the rapidly developing realm of crypto assets while managing a broad set of portfolios for investors. We deeply respect the complexity of these emerging markets. Accordingly, we carefully choose which crypto projects we back. Though many projects will rise and fall in the coming years, a fundamental truth remains: We are dedicated to championing a future where all global citizens are united by access to fair monetary systems, financial services, and digital sovereignty. 

By Nathan Frankovitz