Natasha Drake, May 26th, 2021
Elon Musk and Bitcoin: Why the reversal?
Tesla’s mogul is making a mistake with the world’s biggest cryptocurrency
Whether about Bitcoin, Ethereum, Dogecoin, Binance Coin, Polkadot, Cardano, Ripple, Dash, or one of the thousand other options, cryptocurrency — the secure, decentralized alternative to traditional banking and currencies — is more popular than ever. Last February the electric vehicle giant Tesla purchased $1.5 billion USD worth of bitcoin and announced that it would begin accepting Bitcoin as payment. The ascendance of crypto seemed unstoppable.
But was it, really? On May 13th, Tesla CEO Elon Musk tweeted that the company would reverse its Bitcoin-friendly stance due to its supposedly excessively large environmental impact. The announcement resulted in sudden and severe devaluations for not only Bitcoin, but for all cryptocurrencies writ large.
Despite this head-spinning development, crypto has still inarguably had its best year ever. Besides Tesla, corporations (Venmo, Square, PayPal, Facebook) and traditional banking and financial institutions (Visa, Mastercard, Morgan Stanley, JP Morgan, Blackrock) alike have added cryptocurrencies to their offerings. Though only 15% of Americans currently own cryptocurrency, it’s clear that the world’s biggest institutions are embracing it as the financial product of the future.
Let’s take a closer look at cryptocurrency through the lens of Tesla’s embrace and rejection of it: environmental concerns about crypto mining, why the environmental costs are different from what you may think, and what the future holds for cryptocurrencies and the technology it is based on.
Cryptocurrency in brief
But what is cryptocurrency? If you haven’t been following the news, it can sound, well, cryptic.
Cryptocurrency (crypto for short) is a form of digital currency that uses cryptography to secure and verify transactions. This is in contrast to traditional currencies (US dollars, euros, Japanese yen, etc), where a trusted third party institution, like a bank or credit card company, verifies the transactions. Instead, crypto transactions are verified across a vast, decentralized network of computers.
Crypto worldwide has a total market capitalization of $1.67 trillion USD (and increasing). Though there are thousands of different cryptocurrencies available today, Bitcoin was the first. Founded in 2009 by a mysterious person, or group of people, named Satoshi Nakamoto, it’s the most widely used and the most valuable, with a combined equivalent value of $759.4 billion, representing roughly 45% of cryptocurrency.
Blockchain: the backbone of cryptocurrencies
The fundamental technology that makes cryptocurrency possible is blockchain. A special kind of database, blockchain is a ledger of all of the transactions of a given cryptocurrency that have ever occurred, arranged in chronological order and encrypted so that personal information is obscured. Each block in the blockchain contains thousands of individual transactions. In order to verify the transactions in a block, a computer in the network needs to solve a complex cryptographic puzzle.
Finding a solution to this puzzle is difficult, requiring a sophisticated computer and a lot of computational effort. So a clever incentive was built into the system: whoever finds it first is rewarded with a set number of cryptocurrency tokens as compensation. This is what mining is: earning cryptocurrency tokens by racing to verify transactions.
Bitcoin’s energy needs
Crypto mining requires a vast amount of computing power — and a corresponding amount of electricity in order to run the computers. The University of Cambridge estimates the global energy expenditure by Bitcoin mining operations alone as just under 113 TWh per year at the time of this article’s publication, more than the entire annual energy consumption of the Netherlands, and is responsible for releasing an estimated 58 million metric tons of CO2 annually. It’s an alarming number, to be sure — but more on this soon. First, let’s travel back to February 2021.
Tesla’s Bitcoin investment
By early 2021 Elon Musk was already well known for his embrace of non-Bitcoin cryptocurrencies (called altcoins in crypto parlance). Above all others he enthusiastically supported Dogecoin, the altcoin inspired by — you guessed it — the beloved meme.
On February 8th Tesla announced that it was buying $1.5 billion of Bitcoin and would begin accepting it as payment for its electric vehicles. Bitcoin was already having a very good year, but Musk’s endorsement sent it skyrocketing. The value of a Bitcoin immediately jumped 16%, to more than $44,795 each, and by mid-April reached an all-time high of more than $63,729.
(At the end of March it was revealed that Tesla had taken advantage of this rise in value and sold 10% of its Bitcoin holdings for a profit of $101 million. Commentators were split on whether this was an unfair market manipulation or a shrewd display of Bitcoin’s liquidity.)
Deep dive into Tesla’s actions
On May 13th, Musk and Tesla suddenly reversed course.
Tesla was halting the acceptance of payments in Bitcoin due to environmental concerns, Musk announced in a tweet, specifically mentioning concerns about Bitcoin’s carbon footprint and the “rapidly increasing fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.” He continued, “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.”
The crypto world convulsed. The price of Bitcoin immediately fell by more than 20%. Ethereum fell by 8.3%. Even Dogecoin — the cryptocurrency heir apparent in the world of Tesla — fell 21% by May 19th. Though cryptocurrency trading has long been subject to speculation and market volatility, Musk’s announcement worsened this tendency.
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