Prof. Brian Lucey, researcher Yizhi Wang, Trinity Business School, and colleagues share insights into a new index they have developed to understand the impact of cryptocurrency environmental concerns on cryptocurrency prices, financial markets, and economic development. 

When Environmental Concerns Rhyme with Crypto Patterns: Introducing the ICEA index by CoBS Editor Aymeric Thiollet. Related research: An index of cryptocurrency environmental attention (ICEA), Yizhi Wang, Brian Lucey, Samuel Alexandre Vigne, Larisa Yarovaya, China Finance Review International.

Previous research shows how cryptocurrencies contribute to environmental issues, but what about the other way around? What if environmental concerns over cryptocurrencies had a measurable impact on cryptocurrencies in general?

Whether you are an investor eager to optimize your portfolio, a researcher or a policy-maker interested in solving the growth of carbon produced with the rise of new digital currencies, or simply curious about the power of public opinion on major economic and financial trends, the ICEA (Index of Cryptocurrency Environmental Attention) could shed a new light on your issues.

The great absentee

You may have heard about it via social networks or press articles, yet as soon as it comes to public policy, it seems to be the great absentee from the discussions: the environmental impact of cryptocurrencies.

El Salvador recently adopted a digital currency, Bitcoin, as the country’s official legal tender, demonstrating the widespread use of them as a means of payment. However, despite the fact that we now observe that mining cryptocurrencies pollutes more than mining gold, Brian Lucey et al argue that there is no significant public policy that addresses the environmental issues associated with cryptos.

The Index of Cryptocurrency Environmental Attention (ICEA)

Given the very limited research on the growing energy consumption of cryptocurrencies and on how environmental attention could impact cryptocurrency markets, Prof. Lucey and his fellow researchers set out to develop the first index – the ICEA – precisely capturing public attention to the sustainability concerns of cryptocurrency’s growth.

Constructed by analyzing over 778 million news items from 2014 to 2021, the ICEA makes it possible to consider cryptocurrency price shocks and other economic and financial factors in the light of the weight of public environmental concerns.

The ICEA can play the long game

In addition to the necessity of the ICEA, Prof. Lucey and his colleagues observed that the numerous studies analyzing cryptocurrency environmental concerns were carried out at individual, organizational or government level – and very few at macro level.

Subsequently, the ICEA was also used to better understand its relationship with long-term macro-financial markets and economic developments variables. Such variables include: the UCRY indices (indices measuring uncertainty around cryptocurrencies’ prices and policies), the VIX (volatility of the American market), the BCO (crude oil market), Bitcoin (the most widely used cryptocurrency), the GlobalEPU (global economic policy uncertainty), the GTU (global temperature uncertainty), and OECD’s IP index (Industrial Production of cryptocurrencies).

Cryptocurrencies: A story of impact

Once developed, the ICEA demonstrated a significant increase in public attention paid to the environmental impacts of cryptocurrencies between 2014 and 2021. The index also presented particular relationships with the different variables mentioned above. The ICEA had a positive impact on certain measures of uncertainty (UCRY, VIX, GlobalEPU) and financial assets (BCO, Bitcoin), while it had a negative impact on various measures of uncertainty linked to the environment (GlobalEPU, GTU). Moreover, the ICEA had a positive impact on the IP in the short term while having a negative impact in the long term.

In essence, the researchers demonstrated that growing environmental attention directly increases cryptocurrency price fluctuations, but it also helps to reduce environmental uncertainty. As such, increased environmental awareness can lead governments to promulgate better environmental policies. In addition, IP (e.g., crypto mining) generally means pollution and consumption. Consequently, the findings justify that high IP activities can generate high environmental attention in the short-term, which in turn yields lower IP activities in the future when – as a reaction – new environmental protection policies are put in place.

Towards a future of green innovation

Today there is no real consensus on the sustainability of cryptocurrencies. Some researchers argue that the societal value of Bitcoin justifies the resources required to sustain it. However, the environmental impact of cryptocurrencies is real and growing, and – in that light – Brian Lucey et al argue that it is necessary to now look at the energy sources that power cryptocurrencies, as well as the public policies that could better address the issues posed by cryptocurrencies.

Policy-makers, investors and researchers, the question is now open: how can we make cryptocurrencies more sustainable?

Useful links:

• Link up with Brian Lucey and Yizhi Wang on LinkedIn
• Read a related article: Unlocking the ESG potential of Bitcoin
• Read this and other articles in Global Voice magazine #27
• Discover Trinity Business School, Trinity College Dublin.

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