A new study, conducted under the supervision of the University of Vaasa in Finland and the University of Turin in Italy, offers fresh insight into how energy use and market stability intersect in the world of cryptocurrency, a sector often criticized for its environmental impact and notorious price swings.
The research, based on Davide Sandretto's doctoral dissertation in finance, suggests that greener, energy-efficient digital assets tend to be less volatile and less reactive to energy price hikes than their energy-intensive counterparts. This finding highlights a potential link between the environment and financial stability in an industry traditionally dominated by rapid innovation and risk.
"We found that more environmentally friendly cryptocurrencies, such as those that transitioned from the proof-of-work to the proof-of-stake protocol, react less to energy shocks," said Sandretto, per the University of Vaasa.
Sandretto's work points to a key driver of these differences. In layman's terms, the proof-of-work protocol used by bitcoin, among others, requires massive amounts of energy, making the asset's value rather sensitive to changes in energy prices, while cryptocurrencies that have adopted more energy-efficient approaches, such as proof-of-stake, appear to react less to those changes.
Reduced sensitivity to energy price swings can translate into smoother price behavior, an attractive trait for investors and portfolio managers seeking diversification tools in an otherwise choppy asset class. "It's a win-win for the environment and for the investor, who faces fewer risks from sudden energy price shocks," Sandretto added, per Phys.org.
Importantly, the study doesn't paint the crypto industry as inherently good or bad.
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Critics note that many networks still consume significant energy and contribute to broader environmental concerns. Yet the research also indicates there's potential upside as more projects embrace energy-efficient designs, offering investors assets less tied to unpredictable energy markets.
All in all, while cryptocurrency can be difficult to understand and has been known to have a larger carbon footprint, energy efficiency could be transformative for investors and the average trader alike. Nevertheless, making sure you're informed is important in this rapidly growing and complex sector.
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