Tesla has had a rocky relationship with cryptocurrencies. EV maker announced in February that it had purchased $1.5 billion (£1.1 billion) in bitcoin and would accept it as a payment method from customers in the future. After rising from just over $39,000 to $46,000, the largest cryptocurrency’s price reached an all-time high of almost $65,000 in April – and a paper profit for Tesla of well over $1 billion.
After just a few short weeks, everything has completely changed. Tesla first made headlines by selling 10% of its bitcoin holdings at the end of April, ostensibly to show the digital currency’s liquidity.
Tesla has suspended bitcoin purchases because of the “rapidly increasing use of fossil fuels” in the cryptocurrency mining process, as Musk announced on Twitter. Bitcoin fell from around $55,000 to around $45,000 before recovering to about $50,000 at the time of writing, prompting a massive sell-off in the crypto markets.
Anxieties about bitcoin’s impact on the environment are nothing new. Its network is protected by “miners” who compete in highly complex number-guessing games using massive amounts of electricity while using arrays of supercomputers. Power consumption can be tracked in real time here, and it’s been well documented that it’s the equivalent of a medium-sized country (currently Egypt). Much of the mining in China is done with coal-fired power plants. This has both environmental and social consequences, although many in China’s crypto industry say they are minor.
If this is true, Musk and Tesla must have known about these problems before the year began. To make matters more confusing, Tesla intends to keep bitcoin on its books despite Musk’s concerns about carbon emissions and the risk that the falling bitcoin price will harm Tesla’s investment. However, since the news of the scandal broke, the stock price of the company has remained relatively stable.
If so, does that mean the bull market is over?
When the tide goes out, all boats rise, but the inverse is also true. Bitcoin bulls are wondering whether the recent price decline signals the end of their bull run, which has seen their cryptocurrency’s value rise by more than five times since October 2020. Since Musk’s announcement, the entire crypto market’s prices have fallen precipitously.
Alternatively, is this just one more historical hiccup as the new kid on the block strives to be the world’s largest currency? Bitcoin’s total market value places it just outside the top ten most valuable currencies in the world.
The irony of Bitcoin is that despite its age, it remains a market dominator. Diesel power is antiquated in an age of electrification, being slow, inefficient, and expensive to use. Although it has a large user base, the Lightning Network, which aims to make transactions faster and cheaper, and Taproot, which aims to improve privacy while also potentially improving transaction efficiency, are both slated for future upgrades.
With 42% of the total market value, Bitcoin is still the most valuable cryptocurrency. Numerous alternative coins have far better sustainability credentials, such as stellar, ripple, and cardano, big names in the industry. However, in the tech industry, the first-mover advantage is still very important. Cryptocurrencies, in particular, are dependent on adoption rates and faith in a product that can only be as strong as the overall belief of the user base.
Aside from the limited supply (over 18 million coins have already been mined), bitcoin has two major selling points: it is not controlled by a single organisation, but rather is distributed among thousands of large owners. If a nation’s currency is depreciating due to quantitative easing, which creates more money while keeping interest rates near zero, a currency with a limited supply will be very appealing to investors. Thus, a large number of businesses and individuals have been dipping their toes in the churning crypto waters recently.
Musk and the Moon
Tesla’s decision to keep its bitcoin holdings is good news for crypto investors. For the time being, crypto exchanges will not have to deal with large sell orders from the world’s largest automobile manufacturer.
Also of note in Musk’s statement is that Tesla may be open to accepting payments in cryptocurrencies with a carbon footprint that is less than 1% that of bitcoin. Dogecoin, the original joke coin turned top ten cryptocurrency, has long been a favourite of Musk’s, with him referring to himself as “the Dogefather” and making jokes about it on Saturday Night Live.
Despite not being scarce or decentralised, Dogecoin has a low energy requirement. As a result, it’s possible that Tesla will add dogecoin to its current bitcoin holdings as a treasury asset and functional currency. In fact, Musk polled his followers on Twitter earlier this week, asking if they wanted Tesla to accept dogecoin. His supporters overwhelmingly said “yes.”
Even if Musk doesn’t give in to their demands, the world’s attention will be focused on him to see what happens next with ethereum or ripple. If you’re curious about where bitcoin stands right now, look no further than the earnings reports of the world’s largest corporations. Drama abounds in this sector of the financial industry, and there will no doubt be more to come.