Elon Musk’s U-turn on Tesla payments for Bitcoin and the future of cryptocurrencies
Tesla's relationship with cryptocurrencies has been a stop-start rollercoaster.
In February, the electric vehicle manufacturer announced it had purchased $US1.5 billion ($1.9 billion) of Bitcoin and planned to accept the cryptocurrency in future as a means of payment from its customers.
The price of the largest cryptocurrency surged that day from just over $US39,000 to $US46,000, on its way to an all-time high of almost $US65,000 in April — and a paper profit of well over $US1 billion for Tesla.
Fast-forward a few short weeks and the situation has changed entirely. First came the news in late April that Tesla had sold 10 per cent of its Bitcoin holdings, reportedly to demonstrate the digital currency's liquidity.
And more importantly, Musk has now announced on Twitter that Tesla has suspended purchases using Bitcoin amid concerns about the "rapidly increasing use of fossil fuels" used in mining the cryptocurrency.
This has prompted a huge sell-off in the crypto markets, with Bitcoin plunging from around $US55,000 to the mid-$US45,000s, before recovering to around $US50,000 at the time of writing.
The concerns around Bitcoin's carbon footprint are hardly new. Its network is secured by "miners" using arrays of supercomputers to compete in very complex number-guessing games, which uses large amounts of electricity.
As has been well reported, this is the equivalent usage of a medium-sized country — currently Egypt — and the power consumption can be followed in real-time here.
Worse, much of this mining relies on coal-fired power in China, although many in the crypto industry contend that the impact is far more moderate than suggested.
Either way, it is difficult to believe that Musk and Tesla were not aware of these issues at the start of the year.
And the fact that Tesla still intends to keep Bitcoin on its balance sheet makes the announcement even more confusing — both because it seems inconsistent with Musk's fears about carbon emissions, and because Tesla's investment could be damaged by the falling price of Bitcoin.
As it happens, the company's share price has been fairly steady since the story broke.
Musk and the moon
Crypto investors can console themselves that Tesla is not selling its Bitcoin holdings. For the moment at least, crypto exchanges are not going to have to be processing large sell orders from the world's biggest car company.
One other thing to note in Musk's statement is that he said that Tesla was also potentially interested in accepting payments in cryptocurrencies with less than 1 per cent of bitcoin's energy footprint.
Musk has previously expressed his apparent affinity for the original joke coin turned top ten cryptocurrency, Dogecoin, declaring himself "the Dogefather" — and making reference to the currency in his recent appearance on Saturday Night Live.
Dogecoin is certainly low-energy, albeit neither scarce nor decentralised. So it is possible that Tesla may pivot to Dogecoin as a treasury asset and functional currency to supplement its existing Bitcoin holdings.
Indeed, earlier this week, Musk ran a poll on his Twitter account, asking, "Do you want Tesla to accept doge?" The overwhelming answer from his followers was "yes".
Whether Musk gives them what they want or backs some other cryptocurrency like ethereum or ripple, all eyes will certainly be on him to see what happens next.
As for Bitcoin, analysts will be scouring the earnings statements of the biggest companies to see if any have moved the cryptocurrency into their treasuries.
This part of the financial world is never short of drama, and there's bound to be more right around the corner.
Gavin Brown is an associate professor in financial technology at the University of Liverpool. This piece first appeared on The Conversation.