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Earlier this week, Tesla announced that it would no longer accept cryptocurrencies as payment for its products, exacerbating already nervous market sentiment. As usual, the crypto market is focused on the narrative at hand. If Musk says Bitcoin is bad for the environment, other large investors might decide to sell out of fear of public scrutiny, right? The expectations game, which involves guessing what others think you are thinking, then makes it a smart move to lighten your position, regardless of the fundamentals. While this could be Musk speaking without thinking, or his board and executives bowing to external pressure, it is worth stepping back and looking at the possible motivations and strategies behind this move, and the results it could bring. First, let’s look at why Tesla’s announcement isn’t that significant, and then we’ll look at why it does matter. Tesla announced that it would begin accepting Bitcoin as a payment method in February of this year, while announcing a $1.5 billion investment in Bitcoin. Even at the time, using Bitcoin as a payment method seemed like a PR stunt. If Bitcoin is a reserve asset used to hedge against the depreciation of fiat currencies, then why would users use it as a payment token? Many people insist that Bitcoin is useless as a payment token given its high fees and slow confirmation times. This ignores the fact that in many parts of the world it is still a better option than the existing system. Bitcoin-based payment channels are spreading. However, for most of Tesla's target users, Bitcoin is unlikely to be a better payment option than a direct bank transfer or a platinum credit card. Tesla's suggestion that Bitcoin is a good reserve asset and a useful payment method shows an intellectual disconnect. If Bitcoin is worth holding as a hedge against fiat currency depreciation, why would users give it up? Especially when they need to raise funds for Tesla and have a lot of idle Bitcoin, they can use the cryptocurrency as collateral for a fiat loan, which they can then use to buy a shiny new car. In other words, the number of Tesla customers interested in paying with Bitcoin will always be small or even non-existent. Removing it as a form of payment feels like another PR stunt, and a clumsy one at that. The economic impact of removing something that almost no one wants will be negligible, both for Tesla and for demand for Bitcoin. The reason for this decision is "the rapid increase in the use of fossil fuels in Bitcoin mining and trading", which is factually wrong, and more detailed information in this regard is not difficult to find. At the same time, Tesla confirmed that it will not sell its current Bitcoin holdings. Therefore, this move gives the impression that Tesla is lazy and irresponsible in terms of research. Tesla shareholders have every right to question why the company is only now knowing about Bitcoin's energy consumption structure; second, hypocrisy: why is "contaminated" Bitcoin acceptable for the balance sheet but not for users as a form of payment? As for credibility, last month, when Twitter co-founder Jack Dorsey tweeted that “Bitcoin incentivizes green energy,” Musk responded: “True.” And you could be in breach of fiduciary duty, something Elon Musk is no stranger to. After the tweet, the price of Bitcoin dropped nearly 8% in 3 hours, causing the market value of Tesla’s Bitcoin holdings to drop significantly. (This does not affect the balance sheet of Tesla, which values Bitcoin at a lower cost or market value.) Musk can be irresponsible at times, and that’s a risk Tesla shareholders know and accept. But he’s not stupid, so what exactly happened? I’m not a mind reader and don’t understand the thought process behind making this statement, but I don’t think it was an impulsive mistake. According to the headline on Tesla’s “About” section of its website, the company’s mission is to “accelerate the world’s transition to sustainable energy.” Last week, Tesla entered the S&P 500 ESG Index (which is up 9.8% year to date as of this writing, slightly outperforming the S&P 500), which selects stocks based on their environmental, social, and corporate governance scores relative to other stocks in the same industry. Earlier this week, Reuters reported that Tesla is looking to enter the multi-billion dollar U.S. renewable fuel credit market, with incredible timing. So Tesla is investing heavily in sustainable energy and Bitcoin. Might we soon see Tesla-branded “green” Bitcoin mining? With the release of the Bitcoin payment statement, Musk has pushed the discussion of Bitcoin being "harmful to the environment" to a higher level. The large number of rebuttals his tweet received was just the beginning, but with Musk's tweets and the subsequent price drop, the community will undoubtedly be more acutely aware that just tweeting is not enough, writing reports is not enough, and this conversation needs to be upgraded to the policy level. What does this mean? It ranges from fiscal incentives to increase spending on energy research and development to outright bans on operations unless the energy mix meets certain criteria. In addition, there are tools for energy subsidy adjustments. Incentives are generally good, bans less so, but the goal will be to push mining companies forward along the energy transition curve. Many are already doing that anyway. And officials are waking up to the potential of attracting cryptocurrency-related businesses to their regions. In many cases, bitcoin mining can boost activity in struggling economies with good natural resources but low infrastructure spending. Officials and regulators face a tough time when it comes to capitalizing on the opportunities of cryptocurrencies. Many of them are still relatively low on the learning curve. We all know that environmental issues are complex, problems are often misunderstood, and "simple" solutions are not. Throw in the still-controversial notion of decentralized self-sovereign currencies, and you have a considerable challenge in identifying social priorities, let alone protecting them. But the more Bitcoin mining is talked about at a policy level, the more “acceptable” it becomes as an industrial activity. Politicians will gradually realize that a ban will simply move these activities elsewhere. The more people understand this possibility, the more politicians will be motivated to come up with solutions that help remove the stigma of pollution. The more mining becomes involved in the renewable energy sector, the cleaner its image will become, removing a potentially significant barrier to wider investment in the Bitcoin market. This is how Tesla’s decision will ultimately help the price of Bitcoin: by escalating a much-needed conversation, it will finally remove barriers to investment, encouraging further development and exploration of the role Bitcoin can play in many fundamental areas of society. |
