Tesla announced last week, via Chief Executive Elon Musk’s Twitter account that they were suspending all vehicle purchases using Bitcoin, the world’s leading cryptocurrency. This represented a significant U-Turn for Musk, and the electric car manufacturer. In the last few months, Tesla opened a $1.5BN position in Bitcoin, began to accept $BTC as a currency option when purchasing vehicles and more recently allowed Musk to host SNL in support of Dogecoin: satirizing himself as the ‘Dogefather’. Consequently, sentiment has been challenged, with the overall Cryptocurrency market cap dropping 20% over the course of the week – a shaving of $250 billion.
Tesla’s official statement read:
‘Tesla has suspended vehicle purchases using Bitcoin. We are concerned about the rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.
Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at a great cost to the environment. We are looking at other cryptocurrencies that use less than 1% of Bitcoin’s energy per transaction’.
There are a lot of questions to unpack here, but let’s firstly start by explaining why Bitcoin transactions use so much energy compared to other Cryptocurrencies.
Bitcoin’s blockchain mining mechanism runs on a ‘proof of work’ system. In a proof of work blockchain, each blockchain node (miner) batches together a bunch of pending transactions sent by users (called a block) and competes to get their block approved by being the first miner to generate a specific cryptographic hash through brute force (i.e. guessing random numbers until correct).
The first miner (node) to generate a valid hash wins the block reward, newly minted Bitcoin.
The value in such blockchain designs is that it is extremely expensive and highly impractical to achieve 51% control over the network. So users can trust to a high degree that the data stored and computation performed on the network is secure, reliable and accurate. However, Proof of Work systems require huge amounts of energy. Miners are incentivised in this system to use as much computational power as possible to run different cryptographic calculations to generate a valid hash.
In 2015 it was estimated that 1BTC transaction required the amount of electricity needed to power 1.57 American households per day. Perhaps an even more concerning statistic is that Bitcoin between 2017-2020 consumed about 119.87 Terawatt hours in electricity – this was more than both the UAE and Netherlands.
There is an alternate system for verifying transactions in decentralised systems, one used by many of the newer altcoins such as DASH, NEO and ChainLink to a limited degree. This system (‘Proof of Stake’), seeks to address the sustainability challenge of mining. In a Proof of Stake system, mining power is derived in proportion to the number of coins held by a miner. This way, instead of being incentivised to acquire, and run, as much computational power as possible, a Proof of Stake miner is limited to mining a % of transactions that is reflective of their overall ownership stake in the coin. So, a miner that owns 0.02% of all coins available can only mine 0.02% of all blocks.
Proof of Stake systems have historically used less than 1% of the energy consumption of Proof of Work systems. In fact, Tesla’s official statement was highly likely referencing their desire to move to Proof of Stake systems by stating that they are looking at Cryptocurrencies that use ‘less than 1% of Bitcoin’s energy per transaction’.
So, if Proof of Work systems are so bad for the environment, why can’t Bitcoin just transition to a Proof of Stake model?
It would be incredibly challenging, and highly unlikely for Bitcoin to move to Proof of Stake (as Ether is soon to do with the transition to Eth 2.0) due to some technical challenges involved in the process. Bitcoin is a ‘legacy’ blockchain, and any move away from its current model would massively disincentivize the hardest working miners up until this point. Miners that the network depends upon for security, and decentralisation.
Tesla clearly understood the sustainability issues surrounding Bitcoin and its underlying technology when they opened their position in March. This is not new information. And so their decision to coat their U-Turn with the veneer of ‘sustainability’ rightly has many questioning whether Tesla and Musk’s conduct has been shadier than initially presumed.
It is this ideological switch that has caused Elon Musk to become such a figure of contempt in the Cryptocurrency world. Tesla made $101 Million by selling 5% of their stake just two months after purchase – contributing to 25% of its overall profit for the year. To many, it appears Elon has made his money and left retail traders in the mud.
It doesn’t help that the man seems to be actively trying to push to catalyse a bear market with every tweet. And, while it’s doubtful Elon alone can have a sustained effect on long-term sentiment the correlation between his critiques and short-term market prices is irrefutable.
So, is this yet another example of Musk manipulating financial markets?
Musk has a tumultuous history with the Securities Exchange Commission in the U.S. In 2018, the SEC brought forward a lawsuit against Musk for securities fraud, pertaining to another of Elon’s infamous tweets, regarding taking Tesla private at $420 per share. Outside of various financial penalties that stemmed from this case Elon, notably, agreed to have his tweets overseen by an independent body before posting.
It is this relationship with the SEC that pushes one to question whether or not Elon’s participation in the Cryptocurrency world may have more to it than meets the eye. After all, Cryptocurrency is still not formally considered an asset class, and thus the SEC bears no control over Musk’s behaviour within the market. In short, he can get away with whatever he wants. It would not be unfair to claim that he makes the most of this freedom.
The best, (or the worst) of Musk’s unfiltered conduct has been displayed through his relentless propaganda of the self-proclaimed ‘Memecoin’ DOGECOIN ($DOGE). Established as a joke in 2014, $DOGE has little to no use-case besides P2P transactions. A space in which it holds weaker security, speed and efficiency than dozens of its competitors. Musk’s tirade to pump $DOGE to the moon even involved an appearance on SNL, in which he satirised his own conduct as that of a ‘Dogefather’. Describing $DOGE as a financial stimulus for his followers, Musk’s public support has driven $DOGE to rise 12,000% since January.
Very few individuals would claim Elon has not been aggressively manipulating the cryptocurrency world over the last few months. He is not oblivious to his freedom within the market and takes full advantage of it. His understanding of the underlying technology in the space, and the developments in the smart contract & oracle worlds of the cryptocurrency market appears surprisingly weak. As a consequence, it is a challenge to understand his motivation, or end-game in the market. Rest assured, no small part of his participation stems from the fact it provides a chance for him to stick his middle finger up at the SEC without reproach.
Given Musk’s comments, and the subsequent crashes of the last week – it is no surprise a coin has been released under the ticker $FUCKELON. And, to be quite frank, I wouldn’t bet against it being around for some time…