Green Investors in Non-Green Markets: Evidence from The Merge of Ethereum

Abstract

We examine how capital allocation responds to the technological abatement of a major environmental externality in cryptocurrency markets. Exploiting 34 million account-level trades around Ethereum's The Merge, a quasi-natural experiment that reduced the asset's carbon footprint by over 99.9%, we examine the presence of environmentally conscious (green) investors. To disentangle environmental concerns from general yield-seeking or reactions to altered protocol tokenomics, we identify these investors ex-ante by their revealed preference to divest when public attention to global warming escalated during a pre-event quiet period. Results show that these sophisticated green investors apply a significant brown discount pre-Merge, purchasing less Ether than their peers. Interestingly, this gap closed entirely post-Merge, indicating the rational removal of an environmental penalty rather than a market-wide pursuit of new staking yields. A decomposition of returns reveals that green investors earned superior financial gains relative to the non-green peers pre-Merge. However, the advantage vanished thereafter, indicating that the trading activeness reflects the sophisticated pricing of environmental transition risk rather than pure altruism. Overall, we argue that technological abatement can reshape capital flows and thus serve as a powerful complement to environmental regulation.