Tackling climate change is multifaceted and complex. One of the primary challenges it presents our current system is that of decarbonizing energy production and consumption.
Consequently, one of the most impactful levers we have for decarbonization is accelerating renewable energy production to decarbonize grid energy.
This investment depends on certain theses of the energy and crypto landscape becoming facts in the next 7-10 years.
First, the renewable energy attribution market is poised to explode from its current size of $12 billion (in the United States) at a 12.5% CAGR. This expansion will be driven by the digital infrastructure to provide liquidity for RECs, and the metadata and provenance of a REC will broadly expand the demand side of the market by enabling trust and confidence in ESG-minded buyers, and these REC purchasers will drive capital into the hands of asset owners.
Secondly, if we create a bridge between sustainably-mined Bitcoin and investors, large amounts of capital will enter the renewable energy market via bitcoin miners who are newly incentivized to use verified clean energy. Incentivizing green energy choices for Bitcoin miners and concurrently overcompensating for the historical energy consumption of the network can be a massive lever for climate action. Institutional investors around the world are eager to invest in Bitcoin in order to add both alpha and beta to their portfolios, however, many institutional investors have ESG frameworks that prevent them from investing in bitcoin because of the environmental impacts.
Sustainable Bitcoin Protocol (SBP) leverages bitcoin’s sustainability challenges to create a “sustainability flywheel”, making bitcoin not just sustainable but climate positive, and in turn, allows institutional investors with ESG frameworks to add bitcoin to their portfolios. When investors invest in Bitcoin and add a Sustainable Bitcoin Certificate (SBC) issued by SBP, the additional SBC purchases will drive capital into the REC market. Increased demand for Bitcoin and SBCs enables the protocol to purchase increasingly more high quality RECs and retire them, giving renewable energy asset owners liquidity to expand operations by driving capital into new wind, solar, and methane mitigation operations.
What we need is massive amounts of climate finance, and this protocol gets us there because corporate purchasers and institutions will not enter the bitcoin market due to ESG concerns. By addressing investors' bitcoin concerns with provable, transparent data of green energy use, we enable them to enter the market. The main targets to start will be ETFs and ETPs as well as US-based BTC trusts. The SBP team has laid a strong foundation for institutional adoption by solidifying relationships with the leading digital asset custody providers such as BitGo, Copper, Komainu (Nomura), Zodia (Standard Chartered), as well as leading OTC Desks such as DRW Cumberland, B2C2, Kraken, and OSL.
Thirdly, this investment hinges on the fact that renewable energy will be the cheapest source of energy for most miners across the world, and that this renewable energy premium will continue to fall well below the cost of energy derived from coal, incentivizing all miners to move to renewable energy. Bitcoin miners are inherently a search function for finding the cheapest energy source—and the cheapest sources of energy are becoming more and more renewable, but they often are not purchasing the Renewable Energy Attribution (EACs such as RECs, G.O.s, or i-RECs), which are the backbone of clean energy accounting, and a key source of financing for clean energy developers and asset owners. With the introduction of the SBC, miners, which constitute one of the largest new energy load sources in the United States, can pass through the additional cost of attribution to institutional investors who desire to prove that the BTC they hold meets their ESG mandates and frameworks.
What is Sustainable Bitcoin Protocol?
SBP’s core product is the “Sustainable Bitcoin Certificate” (SBC), an environmental commodity that encapsulates the sustainability of a single bitcoin. Investors can purchase SBC and add it to their bitcoin holdings in order to meet or exceed the “E” for environmental in their ESG frameworks. SBC is built on the Ethereum ERC-20 token standard. ERC-20 is the most ubiquitous token standard and most easily adopted from an institutional custody and trading perspective, which helps to reduce friction of adoption.
To create supply of SBC, the protocol has developed a Bitcoin Miner Platform. The miner platform measures three key components:
- Energy Consumption: the platform has direct connectivity to 70% of utility providers in North America via UtilityAPI, a tool that was spun out of the U.S. Department of Energy. For bitcoin miners buying energy from utilities outside of the API’s coverage, the user can manually submit documentation such as utility bills.
- Clean Energy Verification: the protocol leverages third party organizations to do clean energy verification. The rationale for this is to keep a separation of “church and state” i.e. the clean energy verifier relative to the SBC issuer. On the grid energy side, SBP has partnered with ClearTrace, a clean energy verification technology company that is used by the likes of JP Morgan, Brookfield Asset Management, and Google. On the waste gas verification side, SBP is exploring a partnership with Project Canary to monitor the mitigation of methane emissions using onsite cloud based metering and satellite data.
- Bitcoin Production: the protocol records the production of bitcoin via API connectivity to Bitcoin mining pools, such as Foundry and Luxxor. Over time, the team will build connectivity to every BTC pool utilized by miners participating in the protocol.
Why did we invest?
The recent spate of headlines coming from the largest global banks and asset managers highlights the work that is being done by many institutions to capitalize on the growth of Bitcoin and the potential new market share that can be won from their client wallets. SBP's focus has always been institutional and they have created a product that can unlock some of the $41T (and growing) of capital earmarked for ESG that can potentially flow into Bitcoin.
For the past 12 months they have been speaking with a number of the existing ETF and ETP providers to launch a new “Sustainable Bitcoin ETF” that can attract this capital earmarked for ESG. Considering the forecast AUM growth of ESG capital globally, an ETF partnership would see the protocol scale incredibly quickly, potentially to a level that eclipses the 640,000 BTC that is currently held by Grayscale, becoming profitable along the way.
The market dynamics can best be understood by walking through a product transaction. On the supply side, a customer such as a miner who wants to prove their mined bitcoin comes from 100% verifiably green energy receives an SBC. The SBC reflects the energy use at the time of minting required to mine at least 1 BTC. Today, for instance, that energy use stands at more or less 400 MWh. SBP (the company) then prices this SBC based on the cost of RECs commensurate with 400 MWh, which today can be between $3-$4, such that the SBC is worth about $1400.
Now, on the demand side, one of SBP’s customers from their target segments, e.g. asset managers, banks, RIAs or broker-dealers, ETFs and ETPs, or family offices who want to hold bitcoin will work with SBP directly or through an OTC desk to purchase BTC. If they purchase, for instance, 500 BTC, they would also get 500 SBCs, which are $15.5M and $700,000 respectively. The SBP revenue represents a roughly 5% additional fee that guarantees the BTC have been mined sustainably.
Climate action this is a fantastic flywheel. Essentially, what this market represents is an opportunity to drive nearly exponentially increasing sums into the hands of solar, wind, and hydro asset managers because of the increasing energy use of bitcoin mining. As miners compete to mine BTC, the energy required to mine goes up, while the need to prove renewable energy use to mine is a forcing function to limit emissions. As the energy use for a mined BTC goes up from 400 MWh to 500 and beyond, the purchases of SBCs by institutional investors will drive more capital into the hands of these asset managers laying down renewable energy via the RECs purchased to back the SBCs. We’re excited to see how this climate impact scales because it’s one of the few models that can scale with growth assumptions baked in, not flat-lining or degrowth.
Thankfully, these are not hypotheticals—the team has already demonstrated this market and market growth via one of their first sales. One of their first clients, an asset manager, recently purchased £5M worth of BTC (243 BTC), representing $404,800 in revenue to SBP, of which $344,080 goes into purchasing RECs, with the $60,720 remainder as gross profit. SBP takes the revenue from selling SBCs to this asset manager, and purchases RECs at $3 per REC and retires them to deliver cash to the solar asset manager and give their customer, the asset manager the ability to claim that their BTC has been mined sustainably. It’s a fascinating potential flywheel for climate action.
Current Customer Feedback and Reference Calls
The feedback from the leaders in sustainable mining has been very interesting to us as we conducted diligence on SBP. Specifically, the market demand from the largest players here, who are well capitalized (Crusoe has raised $747.5M) signals that they have a largely unmet need. Crusoe started in this space by first engaging with Verra, not only to get carbon credits for their methane mitigation activity, but also to co-design a sustainable bitcoin methodology that can be scaled to the sector.
SBP fulfilled that niche together with Cleartrace and other carbon accounting firms. With these two partners, Crusoe has actively been developing a methane mitigation (waste gas pilot) methodology to legitimize the space and make it easier for the market to perform climate-aligned mining. Crusoe and SBP’s other pilot partner, CleanSpark, see this as a way to create a new market. Most of the miners who are claiming to mine sustainably are plugging into the grid and buying RECs. Crusoe and CleanSpark do not want to simply use grid energy and buy RECs, because there is no guarantee of clean energy use when accessing grid energy in peak hours. By working with SBP and Cleartrace to pilot a waste gas methodology, Crusoe is looking to create a market for clean and sustainable mining, that becomes a center of gravity drawing in all the other miners in the market to mitigate methane, issue SBCs, drive up the price of RECs, and deliver more capital into the hands of renewable asset managers, with zero fraud / greenwashing.
We’re excited to see what the founders, Bradford and Matt, can accomplish in the coming bull market in BTC.
Nothing contained herein constitutes investment, legal, tax or other advice nor is to be relied upon in making an investment or other decision. This article contains the opinions of the author, and such opinions are subject to change without notice. Furthermore, it may also include data and opinions derived from third party sources. Cerulean Ventures does not accept liability for the accuracy or completeness of any such information or opinions which can be subject to change without notice.