Like plucking the petals off a tulip, Elon Musk seems to be on a one-man mission to bring down Bitcoin. We’ll guess at why he’s doing it in a minute. Let’s first focus on what he’s doing and what it means for Bitcoin.
The current drama started on January 29, 2021. It was on that day that Elon Musk added the hashtag #Bitcoin to his Twitter bio. Bitcoin skyrocketed from $32,000 to $38,000 on the news. So much for fundamentals.
Two days later in a Clubhouse chat he described Bitcoin as a “good thing:” “I do at this point think bitcoin is a good thing, and I am a supporter of bitcoin.”
Then in February Tesla disclosed in an SEC filing that the electric carmaker had purchased $1.5 billion in Bitcoin. It also announced that it would begin accepting Bitcoin as a form of payment.
During much of this time, however, Musk’s tweets focused far more attention on Dogecoin, not Bitcoin. As just one of many examples:
Perhaps we should have seen the writing on the moon at this point.
In the months that followed, Bitcoin rose to a high of over $63,000. Still a volatile asset, it dropped back into a range in the mid-50s until this tweet heard round the world:
In a subsequent tweet, Musk clarified his position on crypto: “To be clear, I strongly believe in crypto, but it can’t drive a massive increase in fossil fuel use, especially coal.”
In retrospect, it does seem curious that a car company dedicated to clean energy would stand behind a digital asset the mining of which consumes more electricity than Argentina. There are of course valid arguments about its carbon footprint. And many compare Bitcoin’s energy consumption to everything from gold mining to powering Christmas lights.
Yet it can’t be denied that a significant amount of Bitcoin mining is powered by coal. As reported by Fortune, a flood shut down a coal mine in China and halted one-third of Bitcoin’s global computing power. Musk took note:
Many pushed back. Mark Cuban argued that Bitcoin will become the new store of value, displacing gold and shrinking big banks and coin usage:
It may be a bit premature to conclude that a cryptocurrency not old enough to drive will displace a commodity dating back over 5,000 years. And given that Bitcoin can’t function as a currency in any practical sense, one has to wonder just how useful it is or ever will be.
And all of that brings us back to Elon Musk. He now seems to be long on Dogecoin and short on Bitcoin. Why the change of heart on Bitcoin?
One answer may be that Tesla’s Board of Directors influenced his thinking. The problem here, however, is that they would no doubt have been notified about the company’s decision to buy $1.5 billion of the token earlier this year. Why didn’t they object then?
Perhaps Occam’s razor provides the best answer. Musk came to appreciate that Bitcoin consumes an enormous amount of energy, much of it from coal. At the same time, Bitcoin’s blockchain is incredibly inefficient, rendering the token all but useless as a practical currency. The result is a cryptocurrency that is both bad for the environment and virtually useless in any practical applications.
In contrast, other tokens are for more efficient in both energy consumption and transaction processing. And advances in blockchain technology can drive even more efficiencies as we will see, for example, with Ethereum 2.
If this explains his reversal on Bitcoin, it still doesn’t answer why he only now came to these conclusions that have been obvious for some time. It also doesn’t answer whether his next Tweet will yet again reverse his stance on Bitcoin.
So what does this mean for the future of Bitcoin. Everything and nothing at all. Musk has certainly shined a light on the shortcomings of Bitcoin. In that sense, he’s done us all a good service. History won’t be kind to Bitcoin.
In the long term, however, he may have little influence over the token. If the current market has taught us anything, it’s that news ages fast. Remember Gamestop?
Perhaps this tweet about his appearance on Clubhouse gives us the best clue of what’s to come:
As for me and my house, we’ll stick with low cost index funds and a 3-fund portfolio.