Three months after Tesla stated that it would start accepting Bitcoin as payment (1), the electric car manufacturer has taken an abrupt U-turn.
On Wednesday, in a message posted on Twitter, Tesla’s CEO, Elon Musk, stated that the electric car manufacturer had halted accepting Bitcoin over concerns about the energy consumption for computers crunching the numbers that underpin the digital currency.
Elon Musk wrote (2) that ‘even though cryptocurrency is good on many levels and has a promising feature, it can not come at a great environmental cost. We are concerned about the rapidly surging use of fossil fuels for Bitcoin mining and transactions, especially coal, the worst emissions of any fuel.’
Tesla & Bitcoin pic.twitter.com/YSswJmVZhP
— Elon Musk (@elonmusk) May 12, 2021
Earlier this year, Tesla had announced that it had bought 1.5 billion USD worth of Bitcoin and Elon Musk trumpeted the company’s plan to accept the digital currency as a payment. Later, Tesla sold about 300 million USD of its Bitcoin holdings, which padded its bottom line in the first quarter.
́Elon Musk also wrote that ‘Tesla will not sell any Bitcoin and intends to use it for the transaction after mining transitions to more sustainable energy,’ referring to the process of new Bitcoin creation.
Bitcoin has plunged following his statements. It dropped 17% to 47,256.504 USD early Thursday. Notably, Tesla shares also fell 4.4% to 589.89 in Nasdaq trading on Wednesday. The company has declined 16% in 2021.
The use of Bitcoin to purchase Tesla’s electric cars had highlighted a dichotomy between Elon Musk’s image as an environmentalist and the use of his stature and popularity as one of the world’s richest individuals to back cryptocurrencies.
Several Tesla investors and environmentalists have been highly critical of Bitcoin mining using enormous electricity generated using fossil fuels.
Notably, Bitcoin is created when high-powered computers compete against other devices to solve complex mathematical puzzles. It is an energy-intensive method that presently often relies on electricity generated with fossil fuels, particularly coal.
As per the latest data available from the University of Cambridge and the International Energy Agency, at present rates, such Bitcoin mining devoured the same energy amount annually as the Netherlands did in 2019.
As cryptocurrencies climb in value, the amount of energy used by digital currencies is highly under scrutiny. According to a recent BBC report (3), mining uses ‘more electricity than Argentina’ since it needs enormous computing power to continuously log and confirm all transaction data to the Bitcoin blockchain.
A 2019 study in Joule, a scientific journal, estimated that Bitcoin production generated between 22 to 22.9 metric tons of carbon dioxide emission a year, or between the levels produced by Sri Lanka or Jordan.
Bill Gates had also highlighted in February (4), ‘Bitcoin consumes more electricity per transaction than any other method known to us, and hence, it is not a great climate thing.’
Let’s put it into perspective: one Bitcoin transaction is ‘equivalent to the carbon footprint of over 735,121 Visa transactions or over 55,280 hours of watching YouTube,’ according to Digiconomist, who created a Bitcoin Energy Consumption Index (5). Critics of the comparison point out that the average Bitcoin transaction is worth about 16k USD while the average Visa transaction is worth over 46.37 USD.
While Bitcoin’s carbon problem is hardly a secret, so far, it has not slowed down its price. At present, it is worth almost about 50k USD, compared to about 23k worth at the end of 2020.
Bitcoin supporters state that its carbon footprint estimates are overstated. And if the computers that help Bitcoin transactions and mining are attached to an electric grid that utilizes solar and wind power, its usage will become clearer over time.
However, if we look at the present scenario, regulators are still skeptical of the entire idea of Bitcoin before they can even contemplate the climate concerns.
The Curiosity With This Sudden Move
The sudden move has raised curiosity since Tesla’s recent Bitcoin investment of over 1.5 billion USD had triggered a rise in the currency’s value. It also helped the electric carmaker report the first-quarter project, owing to the 101 million USD gain it recorded from selling 10% of its Bitcoin holdings. Elon Musk has also made several comments that escalated and plummeted Dogecoin (6), a meme-based cryptocurrency that started as a joke.
The about-face on Bitcoin came a day after Elon Musk asked his Twitter followers if Tesla should accept Dogecoin days after he joked that it was a ‘hustle’ during his appearance on Saturday Night Live, a popular American tv show.
Do you want Tesla to accept Doge?
— Elon Musk (@elonmusk) May 11, 2021
Musk stated that the company is looking at other cryptocurrencies that ‘utilize <1% of Bitcoin’s energy,’ without mentioning specific options.
Tesla had disclosed its Bitcoin investment in its annual 10-K filing on 8 February this year, stating that ‘it may acquire and hold digital assets for long-term or from time to time. Additionally, we expect to start accepting Bitcoin as a form of payment for our products in the future, subject to applicable legislation, and on a limited basis initially, which we may or may not liquidate upon acceptance.’
Zachary Kirkhorn, CFO of Tesla, during the company’s first-quarter result calls on 26 April, said that he believed Tesla’s investment had ‘confirmed to be a good decision’ considering the liquidity in the Bitcoin market.
‘We believe in the long-term value of Bitcoin,’ he added. ‘Hence, we intend to hold what we have long-term and continue to acquire Bitcoin from transactions from customers as they buy our products.’
Notably, other cryptocurrencies, including Etherum, also fall before recapturing some ground in Asia trade following Elon Musk’s comments.
Analysts believe that Elon Musk’s about-face was inevitable.
According to Edward Moya, a senior market analyst at the trading company OANDA (7) said that ‘the environmental impact of Bitcoin mining was among the most significant risks for the entire cryptocurrency market.’
Meltem Demirors, a digital asset manager, CoinShares Group’s Chief Strategy Officer, pointed out that it was unlikely that Tesla would sell several, if any, cars via Bitcoin. Moreover, the backflip created positive publicity while also simplifying payment processes.
Demirors added that Elon Musk was getting many criticisms and questions, and the recent announcement allows him to appease critics while still keeping Bitcoin on his balance sheet.
Mark Humphery-Jenner, a finance associate professor at the University of New South Wales, stated that he was more concerned about Tesla management’s hasty and precipitous decision-making.
There have been no comments from Elon Musk on whether he sold any vehicles with Bitcoin.
Support for Cryptocurrency
Several Bitcoin proponents note that the present financial system with its millions of employees and computers in their air-conditioned offices also uses large energy amounts (8).
There have also been growing attempts in the crypto industry to mitigate Bitcoin mining’s environmental harm. Elon Musk can advance the movement who offered 100 million USD investments to pull CO2 from the oceans and atmosphere earlier this year (9).
In theory, it is possible to track Bitcoin sources, enabling one to charge a premium for green bitcoin. Stronger climate change policies by governments worldwide may also help.
As per Yves Bennaim, the founder of a Switzerland-based cryptocurrency think-tank, 2B4CH, it is not so much Bitcoin that is the issue. People are saying it is energy-intensive; hence it is polluting. However, it is only the nature of the energy that we are utilizing today. As Bitcoin will surge, there will be more incentive to make investments in renewable energy sources.
However, critics highlighted that it does not mean there is no impact. There are some cases where Bitcoin mining kept fossil fuel power plants in production when otherwise they would be inactive, adding to the planet’s carbon footprint.
Nonetheless, Bitcoin proponents are optimistic that significant changes are on the horizon.
Elon Musk re emphasized that he is a strong believer in cryptocurrencies.
He also tweeted on Wednesday that he is looking at other cryptocurrencies that users less energy than Bitcoin. He had also polled Twitter users on whether Tesla should start accepting Dogecoin, a meme-based cryptocurrency he has helped turn into a valuable commodity from a joke.
On Sunday, Elon Musk had announced that his commercial rocket company, SpaceX, will start accepting Dogecoin as payment to roll out a lunar mission next year. It came only hours after he sent the cryptocurrency to fall off when he called it a ‘hustle’ (9) during a guest-host spot on the comedy sketch American tv show, Saturday Night Live.
The Chinese Bitcoin miners’ dominance and lack of motivation to swap cheap fossil fuels for expensive renewables could mean few quick fixes to cryptocurrency emissions issues.
Chinese miners account for more than 70% of Bitcoin products, as per data from the University of Cambridge’s Center for Alternative Finance (10). While they use renewable energy, mostly hydropower during the rainy months, they use fossil fuels, mostly coal, for the rest of the year.
It is also at odds with Beijing’s climate goals which has prompted a crackdown by authorities. Unlike fiat currencies, like Indian rupees, or US dollars, no government or central bank controls Bitcoin. It also does not require any middleman to verify transactions. Bitcoin is decentralized by design (11).
Instead of a financial institute, a global, decentralized computer network, mining rigs verify Bitcoin transactions. They race to check transaction blocks to add to Bitcoin’s blockchain, a public ledger. The winner gets new Bitcoins.
Very powerful computers, thousands of them compose mini rings. They labor in unison to solve complex math issues, which requires a lot of energy (12).
As a part of the Paris Agreement 2015 to regulate global warming, China aims to become a carbon-neutral nation by 2060 and reach peak emissions by 2030. These targets are increasingly coming up against Bitcoin.
The Inner Mongolia region, with its cheap energy, accounts for only over 8% of Bitcoin production. In comparison, the United States as a whole only produces about 7% of global Bitcoin.
Earlier in March 2021, the domestic government of China’s Inner Mongolia announced plans to stop all new cryptocurrency mining and close existing operations to limit coal-fired power plant emissions (13).
The huge autonomous region adjacent to Mongolia fell short of the central government’s emissions targets in 2019. It prompted the local development commission to halt crypto mining by the end of April 2021. Reportedly, it led miners to relocate their farms elsewhere in China, where climate-friendly hydropower often commands.
Meanwhile, Bitcoin miners in China seek lower power costs and regulatory burdens, moving further to places such as Kazakhstan, Russia, Iran, Malaysia, which are the biggest Bitcoin mining countries after China and the United States. According to an Asian tech news platform, Forkast, online portals of several major China-based mining pools list farms in those nations (14).
Though Beijing’s official attitude towards the nation’s Bitcoin dominance is somewhat ambivalent, it has recently intermittently clamped down on initial coin offerings for cryptocurrencies and exchanges.
One activity officials are attempting to rein in capital controls. However, according to PeckShield, a blockchain security company, unregulated capital flight from China through digital assets has reached 17.5 billion USD last year.
In August last year, Chainalysis research suggested that about 50 billion USD in crypto assets had left China last year, 18 billion of which was Tether, a relatively stable cryptocurrency.
Chinese cryptocurrency exchanges like Huobi, Binance, and MXC are often provinces of money launderers, as per a July 2020 report of the FATF, Financial Action Task Force, an intergovernmental body that works to promote standards against corruption, organized crime, and terrorism.
With a market cap of more than 200 billion USD, Ethereum is the second-largest cryptocurrency. Nano is another smaller cryptocurrency with a market cap of about 660 million USD already using PoS and an algorithm named Open Representative Voting.
The backers of Nano argue that it is environmentally friendly and more ethical than Bitcoin. Several of Nano’s investors had bought Bitcoin. However, they were turned off because of high energy use, Chinese moral quandary, and pollution issues.
In a conversation with AlJazeera, Colin LeMahieu, founder of Nano (14), stated, ‘centralization of any political or geographic region is a concern. A currency can only be truly global if no particular region has control over it.’
Nano aims to supplant Bitcoin as a more sustainable digital currency via regulation, legislation, and climate advocacy. Nano fans also know that Chinese mining cartels are wary of threats to Bitcoin’s dominance.
Patrick Luberus stated that he prefers Nano because it is one of the ‘fastest digital currencies’ and utilizes only one-tenth of a kilowatt-hour per transaction compared to 600kWh per Bitcoin transaction.
‘Bitcoin has several interesting qualities like self-sovereignty, decentralization, limited inflation, peer-to-peer payments without middlemen, censorship resistance,’ added Luberon. However, he only started looking for alternatives to avoid its massive energy footprint.
Luberus believes that while we already have Bitcoin alternatives that are better in almost every way. However, most people don’t know about them.
China wants to focus on the launch of eCNY, its central bank digital currency, which could give the country more control over financial transactions, political taxation, and financial taxation (15). The United States is nowhere close to issuing its fiat digital money. However, it is keen on stopping crypto from maturing as a haven for money launderers (16).
Meanwhile, the Reserve Bank of India is also coming up with its digital currency that uses private blockchain technology. While it would be different from other technology, the Indian digital currency will be at par with them technologically (17).
The decision came when the Indian government is planning to come out with a new cryptocurrency bill that will either ban or regulate decentralized cryptocurrencies in the country.
Earlier, the Indian government had indicated that it wants to ban virtual currencies in the country completely. A recent amendment (18) indicates that it could roll out measures for better regulations. The Indian government has asked companies to disclose their cryptocurrency dealings and investments as a part of the amendment.