On Wednesday (May 12), just three weeks after agreeing with Jack Dorsey that “Bitcoin incentivizes renewable energy”, Elon Musk shook the crypto market by announcing that Tesla is no longer accepting BTC as a payment method.
On February 8, the world learned from Tesla’s latest annual report (Form 10-K) that the company had invested $1.5 billion in Bitcoin:
The relevant section of the annual report read:
“We hold and may acquire digital assets that may be subject to volatile market prices, impairment and unique risks of loss.
“In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, which was duly approved by the Audit Committee of our Board of Directors, we may invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds and other assets as specified in the future.
“Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future…“
Then, on March 24, Musk, who is the CEO of Tesla and SpaceX (as well as, currently, the world’s third richest person according to Forbes), announced on Twitter that Tesla had started to accept Bitcoin as a method of payment.
Roughly a month later, Bitcoin advocate Dorsey — who is the CEO of Twitter and Square — sent tweet, which referred to a white paper (titled: “Bitcoin is Key to an Abundant, Clean Energy Future”) written by teams at Square and Cathie Wood’s ARK Invest, that suggested he agreed with the paper’s conclusion that “bitcoin mining could encourage investment in solar systems (solar grids + batteries), enabling renewables to generate a higher percentage of grid power with potentially no change in the cost of electricity.” Interestingly, back then, Musk seemed to agree with Jack because he replied to him with a one word tweet that said “True”.
Yesterday, just three weeks after that, Musk sent out the following tweet that makes it appear as though he has suddenly realized that Bitcoin’s proof-of-work (PoW) consensus mechanism is bad for the environment since supposedly Bitcoin mining and transactions consume electricity that comes from fossil fuels (such as coal), which are — as is widely acknowledged — “limited in supply” and “unsustainable for our health and the safety of the environment”.
Now, let’s analyze each of the main sentences in this announcement.
“Tesla has suspended vehicle purchases using Bitcoin.“
Of course, we have no idea how many people, if any, since March 24 have actually used any of their Bitcoin holdings to pay for a Tesla, but the number must be very small since it most people who have a significant amount of BTC (enough to pay for a Tesla) tend to hold it long term for use as an inflation hedge and would be highly unlikely to want to spend it for any purpose. Furthermore, Tesla was only allowing payment with Bitcoin in the U.S., which discourages spending of crypto due to the way that its tax authority (the Internal Revenue Service) treats all kinds of crypto as “assets” rather than “currencies”, which means that using crypto to pay for goods/services in the U.S. triggers taxable events.
“We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions…”
Is it really conceivable that Musk, who is widely seen as one of the smartest people on the planet, did not really understand how Bitcoin works until yesterday?
For instance, in February 2019, during an interview on ARK Invest’s For Your Innovation (FYI) podcast, Musk mentioned that he had some friends who are “really involved in crypto” and called Bitcoin’s design/structure “quite brilliant”.
Did Musk forget that he agreed just three weeks ago with Dorsey’s claim about Bitcoin incentivizing renewable energy ?
Or is possible that Musk was under pressure from environmental groups, investors, customers, and employees about Tesla’s investment in Bitcoin and with Biden’s current focus on clean energy he had to do something to have some kind of defence against people who were saying that Musk should be ashamed of himself for supporting Bitcoin and encouraging its adoption while at the same time claiming that he is committed to sustainable/renewable energy?
“Tesla will not be selling any Bitcoin and we intend to use it for transactions as soon as mining transitions to more sustainable energy.”
First, he says that Tesla will not be selling any of its current BTC holdings; fortunately for Tesla, it already made took a juicy profit in Q1 2021 by selling 10% its Bitcoin holdings (to demonstrate Bitcoin’s liquidity). However, even if Tesla just holds BTC, securing the Bitcoin network will still require all those miners out there to continue using electricity. Does he mean that he wants this announcement to cause a drop in the price of Bitcoin in order to reduce Bitcoin’s hash rate (which represents the computational power needed to confirm BTC transactions)?
Second, several key people in the crypto community have already addressed some of the misconceptions surrounding Bitcoin’s energy consumption. For example, earlier this month, Harvard Business Review published an article titled “How Much Energy Does Bitcoin Actually Consume?” by Coin Metrics Co-Founder Nic Carter.
Anthony Pompliano (aka “Pomp”), Co-Founder of Morgan Creek Digital Assets, said yesterday that he is appearing on CNBC’s “Squawk Box” at 10:50 UTC on May 13 to explain why Bitcoin is “good for the environment”.
James Harris, Commercial Director at leading cryptoasset market data provider CryptoCompare, argued (in a Twitter thread) earlier today that Musk’s announcement makes Bitcoin’s sustainability debate “the centre of attention” and “is a great opportunity for us to meet environmental concerns head on”.
“We are also looking at other cryptocurrencies that use <1% of Bitcoin’s energy/transaction.“
This part of the announcement delighted supporters of altcoins that do not rely on PoW mining. One of those people was Sam Bankman-Fried, CEO of quantitative trading firm Alameda Research and crypto exchange FTX, who is a big fan of Solana (SOL).
The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.