This week, there has been much hysteria about the spectacular backflip made by Tesla visionary Elon Musk when he announced – via Twitter of course – that Tesla would no longer take Bitcoin as payment for Tesla's products.
This reversal comes after Tesla only started accepting Bitcoin in February and was vindication for the Bitcoin army, pointing to its inevitable widespread acceptance and adoption and is likely a big reason why Bitcoin rallied so enormously since then.
The reason behind Musk’s reversal was his concern about the vast energy consumption Bitcoin mining was responsible for, with fossil fuels the primary source of energy typically used. Bitcoin mining involves supercomputers running algorithms to solve complex computational maths problems. According to Cambridge University, Bitcoin mining consumes more power than the Netherlands or Argentina. And, of course, the higher the price, the more incentivised Bitcoin miners will be to allocate more computers (and power). While this is hardly a complex analysis of Bitcoin and its pitfalls, I watched a very funny clip by comedian Bill Maher in which he discusses the power consumption of Bitcoin. Please click here to watch.
Of course, there is nothing new about this issue and Elon Musk should’ve been well aware of this in February so I can understand if Bitcoin disciples are confused by the about-face. But the simple fact is: Elon Musk makes a very valid point.
I have commented on the Bitcoin phenomenon on occasion in recent years, and I continue to believe that Bitcoin (and other cryptocurrencies such as Dogecoin) is the biggest bubble I have seen in my lifetime. To distinguish, that view is not of cryptocurrencies and the blockchain and their real-world applications; there are real benefits of the technology, and I do not doubt that blockchain’s adoption will grow and grow (even the ASX is moving to blockchain technology). But, to achieve the end goal of every bull that cryptos offer a store of wealth like fiat currencies, I see many issues. For example, when Tesla first announced that it would accept Bitcoin as payment, I couldn’t believe that a company would consider accepting consideration that could wipe out the entire profit margin with a few bad days of trading. To achieve that store of wealth status, it may ultimately be that cryptocurrencies are pegged against fiat currencies to eliminate their volatility. Facebook planned on pegging its ill-fated Libra cryptocurrency to the US dollar, and I think that could be the future for mainstream cryptocurrencies as well. Of course, that would bring to an end the real reason cryptocurrencies are becoming so popular: they offer speculative investors significant upside.
Where to from here is anyone’s guess? The shift in Elon Musk’s rhetoric could mark a significant shift in the narrative, and there’s little doubt he has faced pressure to change his stance. It’s quite the conflict to market your company as wanting to change the world and put it on a sustainable future while promoting the most carbon-intensive form of payment possible.
While cryptocurrencies are one of the most common subject matters in financial news these days, it strikes me that the number one subject matter I notice is environmental, social and (corporate) governance (ESG). ESG is the critical theme behind decision-making from professional investors and lenders in recent times (but particularly since the pandemic), and Bitcoin fails this test miserably. The world’s biggest investment company, Blackrock, announced just before the pandemic that it would no longer be investing in coal assets and that sustainability was the key driver behind its investing. To quote CEO Larry Fink in his public letter to global CEOs, ‘climate risk is investment risk’, and I couldn’t agree more. So, while this may be a significant turning point for Bitcoin and the ‘prick’ that bursts the ‘bubble’, it may end up only being a blip as the upwards trend continues. But, at the very least, it should be a warning sign to all Bitcoin investors and at least slow the hysteria surrounding cryptocurrencies.
