Elon Musk and Bitcoin: Why the reversal?
Tesla’s mogul is making a mistake with the world’s biggest cryptocurrency

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.)