Cryptocurrency, NFTs and the metaverse threaten an environmental nightmare – here’s how to avoid it

Recent rallies in stocks popularised on social media have attracted increasing numbers of investors looking to these so-called “meme stocks” for quick returns. But while it might look like a fun game, there are real risks to investing in stocks and other financial products popularised on social media. And with recessions looming around the world, the danger is becoming even more acute.

The term meme stock was traditionally used to describe any share that receives a lot of attention on social media. One of the more notable recent examples of a meme stock, retailer GameStop, saw its stock soar by more than 10,600% in 2021 following discussions by individual investors on r/WallStreetBets – a popular subreddit on the Reddit social media platform. You’ve probably heard about other instances of assets popularised on social media of late, including cinema chain AMC and US retailer Bed Bath & Beyond.

Meme stock rallies have also boosted cryptocurrency products, such as stablecoins and non-fungible tokens – basically any assets for which hype has been built online. And while these new decentralised finance assets are very different to stocks, the way sentiment is formed about these assets on social media tends to be the same.

Recent research I carried out with colleagues aimed to understand the role of Reddit in the GameStop share rally involved a textual analysis of 10.8 million comments on r/WallStreetBets and high-frequency GameStop prices. What we found sends a warning signal to all meme stock investors: online chatter pushes prices up but can’t save investors when asset values start to collapse.

Our analysis showed that online discussions – or “net sentiments”, as shown in the chart below – on r/WallStreetBets helped to initiate GameStop’s price growth and caused a spike in trading volumes during the bullish market for this stock when the hype was high.

Line chart showing trading volumes for GameStop stock (blue) and online discussion of the stock (red).
Online discussion of GameStop by investors versus trading volume (data taken at 30 minute intervals) in January and February 2021. Author's chart using data from Bloomberg and Reddit.
But we found that positive comments by people on Reddit could not prevent GameStop from falling when people started selling. In early February 2021, online sentiment was growing, that is, there were more positive comments about GameStop than negative on r/WallStreetBets, even as investor returns for GameStop stock (recorded at 30-minute intervals for our research) kept falling and trading volume decreased.

Line chart showing returns (blue & red) and online discussion (green) about GameStock shares.
Online discussion of GameStop versus investment returns for the stock taken at 30 minute intervals. Author's own chart using data from Bloomberg and Reddit.
Investors should learn a lesson from the GameStop story. When online commenters are trying to hype a stock, they will often add hashtags such as “to the moon” and HODL (a misspelling of “Hold” – as in hold the stock rather than sell – that has become an acronym for hold on for dear life in the online trading world). But if the price starts falling, it does not matter how many of these hashtags are in the comments on a subreddit, our research shows the wider market reaction to the price decline will outweigh any encouragement made on investment forums.

Don’t believe the hype
Social media often feeds both overconfidence and confirmation biases – probably the most common cognitive biases in business and finance. When reading investment forums, amateur investors are often searching for confirmation of their own decision to invest in a meme stock. These investors then often simply feed each other’s biases by sharing information that confirms this desirable outcome.

And there is even more risk involved in investing in cryptocurrencies versus equities. Crypto markets Recent rallies in stocks popularised on social media have attracted increasing numbers of investors looking to these so-called “meme stocks” for quick returns. But while it might look like a fun game, there are real risks to investing in stocks and other financial products popularised on social media. And with recessions looming around the world, the danger is becoming even more acute.

The term meme stock was traditionally used to describe any share that receives a lot of attention on social media. One of the more notable recent examples of a meme stock, retailer GameStop, saw its stock soar by more than 10,600% in 2021 following discussions by individual investors on r/WallStreetBets – a popular subreddit on the Reddit social media platform. You’ve probably heard about other instances of assets popularised on social media of late, including cinema chain AMC and US retailer Bed Bath & Beyon

Meme stock rallies have also boosted cryptocurrency products, such as stablecoins and non-fungible tokens – basically any assets for which hype has been built online. And while these new decentralised finance assets are very different to stocks, the way sentiment is formed about these assets on social media tends to be the sam

Recent research I carried out with colleagues aimed to understand the role of Reddit in the GameStop share rally involved a textual analysis of 10.8 million comments on r/WallStreetBets and high-frequency GameStop prices. What we found sends a warning signal to all meme stock investors: online chatter pushes prices up but can’t save investors when asset values start to collaps

Our analysis showed that online discussions – or “net sentiments”, as shown in the chart below – on r/WallStreetBets helped to initiate GameStop’s price growth and caused a spike in trading volumes during the bullish market for this stock when the hype was hig

Line chart showing trading volumes for GameStop stock (blue) and online discussion of the stock (red
Online discussion of GameStop by investors versus trading volume (data taken at 30 minute intervals) in January and February 2021. Author's chart using data from Bloomberg and Reddit
But we found that positive comments by people on Reddit could not prevent GameStop from falling when people started selling. In early February 2021, online sentiment was growing, that is, there were more positive comments about GameStop than negative on r/WallStreetBets, even as investor returns for GameStop stock (recorded at 30-minute intervals for our research) kept falling and trading volume decreased

Line chart showing returns (blue & red) and online discussion (green) about GameStock share
Online discussion of GameStop versus investment returns for the stock taken at 30 minute intervals. Author's own chart using data from Bloomberg and Reddit
Investors should learn a lesson from the GameStop story. When online commenters are trying to hype a stock, they will often add hashtags such as “to the moon” and HODL (a misspelling of “Hold” – as in hold the stock rather than sell – that has become an acronym for hold on for dear life in the online trading world). But if the price starts falling, it does not matter how many of these hashtags are in the comments on a subreddit, our research shows the wider market reaction to the price decline will outweigh any encouragement made on investment forums

Don’t believe the hy
Social media often feeds both overconfidence and confirmation biases – probably the most common cognitive biases in business and finance. When reading investment forums, amateur investors are often searching for confirmation of their own decision to invest in a meme stock. These investors then often simply feed each other’s biases by sharing information that confirms this desirable outcome

And there is even more risk involved in investing in cryptocurrencies versus equities. Crypto markets arRecent rallies in stocks popularised on social media have attracted increasing numbers of investors looking to these so-called “meme stocks” for quick returns. But while it might look like a fun game, there are real risks to investing in stocks and other financial products popularised on social media. And with recessions looming around the world, the danger is becoming even more acute.

The term meme stock was traditionally used to describe any share that receives a lot of attention on social media. One of the more notable recent examples of a meme stock, retailer GameStop, saw its stock soar by more than 10,600% in 2021 following discussions by individual investors on r/WallStreetBets – a popular subreddit on the Reddit social media platform. You’ve probably heard about other instances of assets popularised on social media of late, including cinema chain AMC and US retailer Bed Bath & Beyond.

Meme stock rallies have also boosted cryptocurrency products, such as stablecoins and non-fungible tokens – basically any assets for which hype has been built online. And while these new decentralised finance assets are very different to stocks, the way sentiment is formed about these assets on social media tends to be the same.

Recent research I carried out with colleagues aimed to understand the role of Reddit in the GameStop share rally involved a textual analysis of 10.8 million comments on r/WallStreetBets and high-frequency GameStop prices. What we found sends a warning signal to all meme stock investors: online chatter pushes prices up but can’t save investors when asset values start to collapse.

Our analysis showed that online discussions – or “net sentiments”, as shown in the chart below – on r/WallStreetBets helped to initiate GameStop’s price growth and caused a spike in trading volumes during the bullish market for this stock when the hype was high.

Line chart showing trading volumes for GameStop stock (blue) and online discussion of the stock (red).
Online discussion of GameStop by investors versus trading volume (data taken at 30 minute intervals) in January and February 2021. Author's chart using data from Bloomberg and Reddit.
But we found that positive comments by people on Reddit could not prevent GameStop from falling when people started selling. In early February 2021, online sentiment was growing, that is, there were more positive comments about GameStop than negative on r/WallStreetBets, even as investor returns for GameStop stock (recorded at 30-minute intervals for our research) kept falling and trading volume decreased.

Line chart showing returns (blue & red) and online discussion (green) about GameStock shares.
Online discussion of GameStop versus investment returns for the stock taken at 30 minute intervals. Author's own chart using data from Bloomberg and Reddit.
Investors should learn a lesson from the GameStop story. When online commenters are trying to hype a stock, they will often add hashtags such as “to the moon” and HODL (a misspelling of “Hold” – as in hold the stock rather than sell – that has become an acronym for hold on for dear life in the online trading world). But if the price starts falling, it does not matter how many of these hashtags are in the comments on a subreddit, our research shows the wider market reaction to the price decline will outweigh any encouragement made on investment forums.

Don’t believe the hype
Social media often feeds both overconfidence and confirmation biases – probably the most common cognitive biases in business and finance. When reading investment forums, amateur investors are often searching for confirmation of their own decision to invest in a meme stock. These investors then often simply feed each other’s biases by sharing information that confirms this desirable outcome.

And there is even more risk involved in investing in cryptocurrencies versus equitiesRecent rallies in stocks popularised on social media have attracted increasing numbers of investors looking to these so-called “meme stocks” for quick returns. But while it might look like a fun game, there are real risks to investing in stocks and other financial products popularised on social media. And with recessions looming around the world, the danger is becoming even more acute.

The term meme stock was traditionally used to describe any share that receives a lot of attention on social media. One of the more notable recent examples of a meme stock, retailer GameStop, saw its stock soar by more than 10,600% in 2021 following discussions by individual investors on r/WallStreetBets – a popular subreddit on the Reddit social media platform. You’ve probably heard about other instances of assets popularised on social media of late, including cinema chain AMC and US retailer Bed Bath & Beyond.

Meme stock rallies have also boosted cryptocurrency products, such as stablecoins and non-fungible tokens – basically any assets for which hype has been built online. And while these new decentralised finance assets are very different to stocks, the way sentiment is formed about these assets on social media tends to be the same.

Recent research I carried out with colleagues aimed to understand the role of Reddit in the GameStop share rally involved a textual analysis of 10.8 million comments on r/WallStreetBets and high-frequency GameStop prices. What we found sends a warning signal to all meme stock investors: online chatter pushes prices up but can’t save investors when asset values start to collapse.

Our analysis showed that online discussions – or “net sentiments”, as shown in the chart below – on r/WallStreetBets helped to initiate GameStop’s price growth and caused a spike in trading volumes during the bullish market for this stock when the hype was high.

Line chart showing trading volumes for GameStop stock (blue) and online discussion of the stock (red).
Online discussion of GameStop by investors versus trading volume (data taken at 30 minute intervals) in January and February 2021. Author's chart using data from Bloomberg and Reddit.
But we found that positive comments by people on Reddit could not prevent GameStop from falling when people started selling. In early February 2021, online sentiment was growing, that is, there were more positive comments about GameStop than negative on r/WallStreetBets, even as investor returns for GameStop stock (recorded at 30-minute intervals for our research) kept falling and trading volume decreased.

Line chart showing returns (blue & red) and online discussion (green) about GameStock shares.
Online discussion of GameStop versus investment returns for the stock taken at 30 minute intervals. Author's own chart using data from Bloomberg and Reddit.
Investors should learn a lesson from the GameStop story. When online commenters are trying to hype a stock, they will often add hashtags such as “to the moon” and HODL (a misspelling of “Hold” – as in hold the stock rather than sell – that has become an acronym for hold on for dear life in the online trading world). But if the price starts falling, it does not matter how many of these hashtags are in the comments on a subreddit, our research shows the wider market reaction to the price decline will outweigh any encouragement made on investment forums.

Don’t believe the hype
Social media often feeds both overconfidence and confirmation biases – probably the most common cognitive biases in business and finance. When reading investment forums, amateur investors are often searching for confirmation of their own decision to invest in a meme stock. These investors then often simply feed each other’s biases by sharing information that confirms this desirable outcome.

And there is even more risk involved in investing in cryptocurrencies versus equitiesAs concerns rise and hearings are held in the US about the cryptocurrency industry’s effect on the environment, it’s time to address blockchain’s poor sustainability record. The first port of call should be changing how transactions on the blockchain operate – a move which could cut its energy usage by 99.99%.

A cryptocurrency is a digital representation of value that, unlike traditional money, isn’t issued by any central bank or agency. Cryptocurrencies are powered by blockchain technology, which allows the exchange of virtual coins like bitcoin and ether.

Cryptocurrency mining is the process of creating new coins by solving complex mathematical problems. The mining process also validates transactions on the cryptocurrency’s network, proving that they’re genuine.

Crypto transactions are validated in two main ways: using either a “proof of work” or “proof of stake” mechanism.

Proof of work requires miners around the world to compete to complete a maths puzzle. The winner is rewarded with a predetermined amount of cryptocurrency and the ability to validate their transaction.

In proof of stake, cryptocurrency owners validate blockchain transactions based on the number of coins they stake. In other words, cryptocurrency owners are required to put up their own cryptocurrency as collateral for the opportunity to successfully approve transactions.

Proof of work is more secure than proof of stake, but it’s slower and consumes more energy. The mining activities of pioneering blockchains like Bitcoin are based on proof of work and thus use enormous amounts of energy. But switching transactions to proof of stake has the potential to dramatically cut emissions.

Although renewable energy is now being used to power some cryptocurrency activities, that energy could surely be put to better use elsewhere: for example, to power homes or businesses. Instead, if blockchain transactions were verified through proof of stake – a move that Ethereum is planning to make – their energy consumption could be reduced to 0.01% of its original value.

Emissions
The estimated power needed to run the Bitcoin network across the world is an extraordinary 7.46 gigawatts (GW) per year. For comparison, in 2020 an average-sized nuclear plant produced around 1GW of electrical power in a year. The energy required for just one bitcoin transaction could power the average US home for more than 70 days.

A power plant with chimneys emitting smoke
Cryptocurrency transactions consume huge amounts of energy. Roman Ranniew/Flickr, CC BY-SA
As the US committee heard, a bitcoin transaction adds around 400kg of CO² to the atmosphere (assuming it’s powered by an energy mix typical of the UK, of which around two-thirds comes from fossil fuel).

Read more: Crypto countries: Nigeria and El Salvador's opposing journeys into digital currencies – podcast

Together, Bitcoin and Ethereum mining operations emit more than 70 million tonnes of CO² into the atmosphere. That’s the same as the annual exhaust emissions of over 15.5 million cars. One cryptocurrency mining firm is even seeking to restart operations at two coal-fired power plants in Pennsylvania to generate more energy.

Crypto futures
The main concern raised by the US committee was that, given the potential for a dramatic increase in cryptocurrencies’ value, their required energy consumption – and environmental impact – is likely to keep growing.

This is partly thanks to the boom in related markets like decentralised finance (DeFi) and non-fungible tokens (NFTs), which are largely based on the Ethereum blockchain.

DeFi is a financial system using blockchain technology to let users make transactions and investments without going through a central mediator, while NFTs are unique pieces of digital media stored on the blockchain.

Two characters painted on a wall
An artist’s impression of a Bored Ape NFT, one of the most popular images on the market. Scott Beale/Flickr, CC BY-NC-ND
Although DeFi only launched in 2017, its value already hit £85 billion in November 2021. And NFTs’ total sale value grew from £74 million in 2020 to £29.6 billion in 2021.

Also, since NFTs are most commonly created on the Ethereum blockchain – which uses proof of work to verify transactions – it takes a lot of energy to create one. And as NFTs feature prominently in the growing metaverse, their energy demand is only set to increase.

Read more: How Covid broke supply chains, and how AI and blockchain could fix them

It sounds contradictory, but adopting blockchain technology could actually have a positive effect on the environment over the long term. This is because it could allow companies to automate many of their complex payment systems, reducing the number of commuting employees and resulting in fewer transport-related emissions.

While the extent of this transformation is very hard to predict, it’s becoming clear that as blockchain technology grows, its benefits will too. For example, as developments in blockchain continue to break new ground in business and finance, we’re seeing cryptocurrency accelerate financial inclusion for tAs concerns rise and hearings are held in the US about the cryptocurrency industry’s effect on the environment, it’s time to address blockchain’s poor sustainability record. The first port of call should be changing how transactions on the blockchain operate – a move which could cut its energy usage by 99.99%.

A cryptocurrency is a digital representation of value that, unlike traditional money, isn’t issued by any central bank or agency. Cryptocurrencies are powered by blockchain technology, which allows the exchange of virtual coins like bitcoin and ether.

Cryptocurrency mining is the process of creating new coins by solving complex mathematical problems. The mining process also validates transactions on the cryptocurrency’s network, proving that they’re genuine.

Crypto transactions are validated in two main ways: using either a “proof of work” or “proof of stake” mechanism.

Proof of work requires miners around the world to compete to complete a maths puzzle. The winner is rewarded with a predetermined amount of cryptocurrency and the ability to validate their transaction.

In proof of stake, cryptocurrency owners validate blockchain transactions based on the number of coins they stake. In other words, cryptocurrency owners are required to put up their own cryptocurrency as collateral for the opportunity to successfully approve transactions.

Proof of work is more secure than proof of stake, but it’s slower and consumes more energy. The mining activities of pioneering blockchains like Bitcoin are based on proof of work and thus use enormous amounts of energy. But switching transactions to proof of stake has the potential to dramatically cut emissions.

Although renewable energy is now being used to power some cryptocurrency activities, that energy could surely be put to better use elsewhere: for example, to power homes or businesses. Instead, if blockchain transactions were verified through proof of stake – a move that Ethereum is planning to make – their energy consumption could be reduced to 0.01% of its original value.

Emissions
The estimated power needed to run the Bitcoin network across the world is an extraordinary 7.46 gigawatts (GW) per year. For comparison, in 2020 an average-sized nuclear plant produced around 1GW of electrical power in a year. The energy required for just one bitcoin transaction could power the average US home for more than 70 days.

A power plant with chimneys emitting smoke
Cryptocurrency transactions consume huge amounts of energy. Roman Ranniew/Flickr, CC BY-SA
As the US committee heard, a bitcoin transaction adds around 400kg of CO² to the atmosphere (assuming it’s powered by an energy mix typical of the UK, of which around two-thirds comes from fossil fuel).

Read more: Crypto countries: Nigeria and El Salvador's opposing journeys into digital currencies – podcast

Together, Bitcoin and Ethereum mining operations emit more than 70 million tonnes of CO² into the atmosphere. That’s the same as the annual exhaust emissions of over 15.5 million cars. One cryptocurrency mining firm is even seeking to restart operations at two coal-fired power plants in Pennsylvania to generate more energy.

Crypto futures
The main concern raised by the US committee was that, given the potential for a dramatic increase in cryptocurrencies’ value, their required energy consumption – and environmental impact – is likely to keep growing.

This is partly thanks to the boom in related markets like decentralised finance (DeFi) and non-fungible tokens (NFTs), which are largely based on the Ethereum blockchain.

DeFi is a financial system using blockchain technology to let users make transactions and investments without going through a central mediator, while NFTs are unique pieces of digital media stored on the blockchain.

Two characters painted on a wall
An artist’s impression of a Bored Ape NFT, one of the most popular images on the market. Scott Beale/Flickr, CC BY-NC-ND
Although DeFi only launched in 2017, its value already hit £85 billion in November 2021. And NFTs’ total sale value grew from £74 million in 2020 to £29.6 billion in 2021.

Also, since NFTs are most commonly created on the Ethereum blockchain – which uses proof of work to verify transactions – it takes a lot of energy to create one. And as NFTs feature prominently in the growing metaverse, their energy demand is only set to increase.

Read more: How Covid broke supply chains, and how AI and blockchain could fix them

It sounds contradictory, but adopting blockchain technology could actually have a positive effect on the environment over the long term. This is because it could allow companies to automate many of their complex payment systems, reducing the number of commuting employees and resulting in fewer transport-related emissions.

While the extent of this transformation is very hard to predict, it’s becoming clear that as blockchain technology grows, its benefits will too. For example, as developments in blockchain continue to break new ground in business and finance, we’re seeing cryptocurrency accelerate financial inclusion for tAs concerns rise and hearings are held in the US about the cryptocurrency industry’s effect on the environment, it’s time to address blockchain’s poor sustainability record. The first port of call should be changing how transactions on the blockchain operate – a move which could cut its energy usage by 99.99%.

A cryptocurrency is a digital representation of value that, unlike traditional money, isn’t issued by any central bank or agency. Cryptocurrencies are powered by blockchain technology, which allows the exchange of virtual coins like bitcoin and ether.

Cryptocurrency mining is the process of creating new coins by solving complex mathematical problems. The mining process also validates transactions on the cryptocurrency’s network, proving that they’re genuine.

Crypto transactions are validated in two main ways: using either a “proof of work” or “proof of stake” mechanism.

Proof of work requires miners around the world to compete to complete a maths puzzle. The winner is rewarded with a predetermined amount of cryptocurrency and the ability to validate their transaction.

In proof of stake, cryptocurrency owners validate blockchain transactions based on the number of coins they stake. In other words, cryptocurrency owners are required to put up their own cryptocurrency as collateral for the opportunity to successfully approve transactions.

Proof of work is more secure than proof of stake, but it’s slower and consumes more energy. The mining activities of pioneering blockchains like Bitcoin are based on proof of work and thus use enormous amounts of energy. But switching transactions to proof of stake has the potential to dramatically cut emissions.

Although renewable energy is now being used to power some cryptocurrency activities, that energy could surely be put to better use elsewhere: for example, to power homes or businesses. Instead, if blockchain transactions were verified through proof of stake – a move that Ethereum is planning to make – their energy consumption could be reduced to 0.01% of its original value.

Emissions
The estimated power needed to run the Bitcoin network across the world is an extraordinary 7.46 gigawatts (GW) per year. For comparison, in 2020 an average-sized nuclear plant produced around 1GW of electrical power in a year. The energy required for just one bitcoin transaction could power the average US home for more than 70 days.

A power plant with chimneys emitting smoke
Cryptocurrency transactions consume huge amounts of energy. Roman Ranniew/Flickr, CC BY-SA
As the US committee heard, a bitcoin transaction adds around 400kg of CO² to the atmosphere (assuming it’s powered by an energy mix typical of the UK, of which around two-thirds comes from fossil fuel).

Read more: Crypto countries: Nigeria and El Salvador's opposing journeys into digital currencies – podcast

Together, Bitcoin and Ethereum mining operations emit more than 70 million tonnes of CO² into the atmosphere. That’s the same as the annual exhaust emissions of over 15.5 million cars. One cryptocurrency mining firm is even seeking to restart operations at two coal-fired power plants in Pennsylvania to generate more energy.

Crypto futures
The main concern raised by the US committee was that, given the potential for a dramatic increase in cryptocurrencies’ value, their required energy consumption – and environmental impact – is likely to keep growing.

This is partly thanks to the boom in related markets like decentralised finance (DeFi) and non-fungible tokens (NFTs), which are largely based on the Ethereum blockchain.

DeFi is a financial system using blockchain technology to let users make transactions and investments without going through a central mediator, while NFTs are unique pieces of digital media stored on the blockchain.

Two characters painted on a wall
An artist’s impression of a Bored Ape NFT, one of the most popular images on the market. Scott Beale/Flickr, CC BY-NC-ND
Although DeFi only launched in 2017, its value already hit £85 billion in November 2021. And NFTs’ total sale value grew from £74 million in 2020 to £29.6 billion in 2021.

Also, since NFTs are most commonly created on the Ethereum blockchain – which uses proof of work to verify transactions – it takes a lot of energy to create one. And as NFTs feature prominently in the growing metaverse, their energy demand is only set to increase.

Read more: How Covid broke supply chains, and how AI and blockchain could fix them

It sounds contradictory, but adopting blockchain technology could actually have a positive effect on the environment over the long term. This is because it could allow companies to automate many of their complex payment systems, reducing the number of commuting employees and resulting in fewer transport-related emissions.

While the extent of this transformation is very hard to predict, it’s becoming clear that as blockchain technology grows, its benefits will too. For example, as developments in blockchain continue to break new ground in business and finance, we’re seeing cryptocurrency accelerate financial inclusion for those who’ve historically been excluded from hose who’ve historically been excluded from hose who’ve historically been excluded from . Crypto markets are . Crypto markets are e .pe..s...).h.e.e.d.