Elon Musk brings some joy to bitcoin hodlers, but will it last?

Elon Musk, known in some circles as the “Fed” of the crypto world, has helped bitcoin recover some of its losses by tweeting that he held talks with bitcoin miners on improving the sustainability of the digital coin.

The bellwether cryptocurrency is trading 3% higher today, just below $38,000, adding to a 12% gain overnight after Musk’s tweet on Tuesday, where he said: “Spoke with North American bitcoin miners. They committed to publish current & planned renewable usage & to ask miners WW [worldwide] to do so. Potentially promising.”

Last week, Tesla’s chief executive sprung a nasty surprise on bitcoin hodlers when he said his company Tesla will no longer accept bitcoin as a form of payment, a decision he claims was prompted by environmental concerns of the cryptocurrency’s high energy usage. The decision had stunned the crypto world as Musk gave bitcoin a mega endorsement back in February when he announced that Tesla had purchased $1.5bn worth of bitcoin.

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Bitcoin and the wider cryptocurrency markets have struggled in recent week, in part due to Musk’s announcement, but also due to a double whammy clampdown by China, which banned its institutions from providing cryptocurrency services, and banned bitcoin mining in the country. More than 65% of cryptocurrency mining takes place in China.

Is Musk’s latest announcement of holding mining talks enough to reduce volatility in the market?

Environmental concerns aren’t bitcoin’s only problems

Bitcoin mining is the process by which new bitcoins are created and the blockchain technology is maintained. Crypto haters (often called “no-coiners”) note the high energy usage involved in mining. A study by the University of Cambridge, published earlier this year, shows the bitcoin network’s annual electricity usage exceeds that of Sweden’s, at around 121 terawatt hours.

Even if Musk’s talks accelerate greater change and result in a more environmentally-friendly crypto market, digital currencies have several other hurdles to cross. Several countries are piloting central bank digital currencies (CBDCs), as their response to a cashless economy (my colleague John looked at this in more detail last week).

China said in a statement last week that it will “crack down on bitcoin mining and trading behavior and resolutely prevent the transfer of individual risks to the society.”

Crypto-mining operators, including the likes of Huobi Mall and BTC.TOP, announced that they would withdraw some of their services in China following the clampdown on crypto miners.

China is exploring the digital yuan, so it is more likely that its clampdown are measures the country is taking to cut out competition from parallel currencies.

While bitcoin is still up by more than 300% in the last 12 months, it has shed more than 40% since touching an all-time high of $64,748 in mid-April.

Bitcoin is touted as a hedge against inflation. But, with the US potentially heading for a big bout of inflation, investors need to be aware of the fact that a market so vulnerable to tweets from one billionaire means that it cannot be relied on as an inflation hedge nor a serious long-term investment.

By all means pay attention to the space. Take a modest position, perhaps. But don’t bet your house on it.