Elon Musk springs a nasty surprise on bitcoin hodlers

Tesla announced it will no longer accept bitcoin as payment for its cars. Saloni Sardana looks at what this means for the bellwether cryptocurrency.

Bitcoin in front of a Tesla logo
Musk has said Tesla will no longer accept bitcoin in payment for its cars
(Image credit: © Artur Widak/NurPhoto via Getty Images)

There’s never a dull moment in the crypto world. Bitcoin has crashed by more than 10% after Musk, the self-styled “Technoking”, said that Tesla is suspending purchases of its cars using bitcoin, due to concerns about the impact of cryptocurrency mining on the environment.

The announcement comes as a surprise to the crypto world – Musk gave bitcoin a mega endorsement in February when he revealed that his company had purchased $1.5 billion worth of bitcoin.

At the time of writing, bitcoin is down more than 13%, trading just below the $50,000 mark. The bellwether cryptocurrency tanked 13% after Musk’s announcement.

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So what has prompted this apparent change of heart and what does this mean for bitcoin investors?

Bitcoin uses more energy than Sweden

“We are concerned about rapidly increasing use of fossil fuels for bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel”, said Musk. “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.”

That said, Musk said that Tesla will “not be selling any bitcoin”. He also said that the company still plans to use it for transactions once the mining of the coins uses more sustainable energy. He also said the firm will be looking at other cryptocurrencies “that use less than 1% of bitcoin’s energy per transaction”.

Critics of bitcoin point to the high electricity consumption involved in bitcoin mining, the process by which new bitcoins are created and the blockchain technology is maintained. Research from the University of Cambridge – published earlier this year - shows that the bitcoin network already uses more electricity per year than Sweden (the researchers reckon that bitcoin consumes more than 121 terawatt hours annually).

The price of bitcoin has hit a record high in April, on the back of higher mainstream adoption, record low interest rates and as America’s largest cryptocurrency exchange Coinbase went public. Even with Tesla suspending payments with bitcoin, the cryptocurrency is up more than 70% since the start of the year. Hgher prices act as an incentive for cryptocurrency miners to “mine” even more for digital currencies.

While Musk has endorsed both bitcoin and dogecoin – which started as a joke and is up around 8,600% a year – there are clear signs that Musk may actually be backtracking on some of his love for the crypto market.

Musk announced in quarterly results last month that Tesla sold 10% of its bitcoin holdings to foster greater confidence in holding “Bitcoin as an alternative to holding cash on balance sheet”. As such, Tesla cashed out $272m in digital assets, making more than $100m in profit.

The entire value of the crypto market fell to $2.06trn on Wednesday after Musk’s tweet, wiping as much as $365bn off the entire market, notes CNBC.

The implications for cryptocurrencies

With all that in mind, is bitcoin worth investing in?

Bloomberg argues that Elon Musk has become the “central banker of crypto”. And the fact that the cryptocurrency can tumble so sharply after just one tweet from a CEO shows how vulnerable the market is. It’s not just bitcoin. Doge had a rough week after Musk’s appearance on US comedy show, Saturday Night Live, where he likened the digital currency to a “hustle”, just days after it was trading at an all-time high.

Tesla’s announcement shows mainstream adoption of cryptocurrency is highly uncertain, says Laith Khalaf, a financial analyst at investment platform AJ Bell. “Tesla’s decision certainly puts pressure on other big companies who accept bitcoin to review their practices, because boardrooms will now be wary about getting it in the ear from ESG investors on the shareholder register”, Khalaf says. “This highlights that the long-term adoption of cryptocurrencies by businesses, consumers and investors is still highly uncertain, as Tesla itself has pointed out.”

So, while bitcoin has been embraced by institutions this year, long-run adoption may be a while away yet. That said, this will also act as an incentive for bitcoin miners – and also for other coins – to find solutions that allow them to fit better with our current ESG-fixated investment universe.

As far as your investments go, again we’d just reiterate – we don’t think you should ignore crypto. Become familiar with it and if you feel like putting some money into crypto, then by all means do. Just don’t bet your house on it.

Saloni Sardana

Saloni is a web writer for MoneyWeek focusing on personal finance and global financial markets. Her work has appeared in FTAdviser (part of the Financial Times),  Business Insider and City A.M, among other publications. She holds a masters in international journalism from City, University of London.

Follow her on Twitter at @sardana_saloni