Bitcoin Growth Amid Climate Change: Policy and Investment Implications

Abstract

Bitcoin contributes to global carbon emissions on a scale comparable to entire countries in order to secure its decentralized network. This exposes Bitcoin to climate policies aimed at reducing emissions. This paper develops a general equilibrium framework to examine how the stringency of climate policy affects Bitcoin’s valuation and its relationship with the equity market. Our theoretical analysis delivers a key insight: a transition from a lenient to a stringent climate policy increases the conditional correlation between Bitcoin and equity returns, thereby compromising Bitcoin’s appeal as a hedge or diversifier against equity market volatility. Empirical evidence supports this theoretical prediction.