Climate Value at Risk and Expected Shortfall for Bitcoin Market

The study delves into the environmental and economic impacts of the Bitcoin network's carbon footprint by establishing a real-time artificial price for it. This new methodology aids in extending the climate value at risk (VaR) to include climate expected shortfall (ES), utilizing both parametric and semiparametric models. Findings reveal significant potential losses, with the 95th percentile of climate VaR and ES valued at 8.04 and 10.37 billion euros, respectively, and the 99th percentile reaching as high as 11.33 and 14.15 billion euros.

The study highlights a discrepancy between the current carbon pricing and the actual environmental cost inflicted by the Bitcoin network, suggesting that the existing carbon price underestimates the environmental damage. The research advocates for policy changes, including a carbon tax specific to Bitcoin mining and transactions, and improved efficiency in carbon emission allowance pricing within the EU Emissions Trading System (EU EST) to effectively address global warming concerns linked to cryptocurrency operations. Additionally, the paper suggests the development of financial derivatives to hedge against environmental risks and promote low-carbon investments within the cryptocurrency sector. The overall findings indicate a pressing need for more accurate methods to measure the economic value of carbon emissions and more robust climate VaR and ES estimations.