While cynics will call Tesla’s recent policy changes regarding Bitcoin a classic pump and dump, I think that they are a clear demonstration that cryptocurrencies are speculative assets and totally unsuitable to be mediums of exchange.
The facts of Tesla’s involvement with Bitcoin are not pretty.
In early February 2021, Tesla announced that it had bought $1.5bn of Bitcoin and that it would accept Bitcoin as payment for its vehicles.
Estimates vary but I reckon that Tesla paid something like $35,000 for its Bitcoin meaning that it held around 42,850 coins.
The net result was an immediate rally in Bitcoin to $44,000 and the rally continued, largely fuelled by speculation that where Tesla had gone, everyone else would follow.
The idea was that this would cement Bitcoin’s place as a viable currency and, because no central bank can print it, a great store of value and maybe even a replacement for the US Dollar as the world’s reserve currency.
However, if one looked at the terms and conditions by which Tesla would accept payment for its vehicles in Bitcoin, it became abundantly clear why Bitcoin is not a suitable method of payment.
I suspect that Elon Musk decided that the company would take payment in Bitcoin and then the finance department was left to work out how this could be done without exposing the company to the brutal volatility that plagues Bitcoin on a daily basis.
This is why the terms set by Tesla were so poor for the purchaser of the vehicle when paying in Bitcoin.
Tesla then used some of its huge profits in Bitcoin (arguably generated by its own statements), to save its Q1 2021 results.
Of the $438m in net profit generated in Q1 2021, around 23% ($101m) came from selling Bitcoin allowing the company to avoid missing the market’s profitability forecasts for the quarter.
This is where the Tesla critics will jump all over the company as it is not hard to argue that this was a classic pump and dump where one buys an asset, talks it up, and then dumps it as other people jump in and drive up the price.
However, critics would do well to remember that practitioners of the pump and dump do not tell you beforehand that they are going to sell out as Tesla may just have done.
If it turns out that Tesla has already sold out, then the critics will be really jumping up and down.
Tesla has stated that it will no longer accept Bitcoin as payment due to the pollution that it is attached to the asset given that Bitcoin mining is very energy-intensive and a lot of it is carried out using cheap, coal-generated electricity.
However, I think that this was just an excuse used by the finance department to talk Elon out of accepting Bitcoin which is obviously totally unsuitable as a monetary unit.
I see three reasons why Bitcoin and cryptocurrencies, in general, are currently unsuitable to be used as currencies.
- First, volatility: A viable currency needs to be stable when compared to its peers and not subject to wild fluctuations in value.
Currencies that fluctuate wildly in value tend to be present in countries with great economic instability and/or hyperinflation.
In these countries, the US Dollar of the Euro tends to replace the local currency as the medium of exchange.
Bitcoin suffers from even worse instability and volatility, making it very difficult to conduct transactions, as I think Tesla has found.
- Second, easy to transact. Transactions in Bitcoin are not easy and even the process of buying and selling the asset itself is not readily accessible to all who would need it if it is to perform as a medium of exchange.
This is why there are plenty of proxies and ETF’s that simulate the holding of Bitcoin.
- Third, low cost. Transactions in Bitcoin are expensive as the blockchain ledger that supports the currency has to be updated to record the transactions.
This and other costs can make the cost of transacting in Bitcoin as high as 5%.
Unfortunately, this means that it is not until cryptocurrencies are slow-moving and dull assets that they will become suitable to be used as currencies by which time all the speculators and Twitterati will have moved onto something else.
Hence, these issues will prevent cryptocurrencies as they exist today from being able to replace the globally accepted mediums of exchange currently dominated by fiat currencies.
I think that Tesla has come to the realisation of just how impractical it is to transact in cryptocurrencies, and it is these difficulties rather than dirty energy which has driven its recent decision to stop accepting it as payment for its vehicles.
This combined with the fact that cryptocurrencies have no fundamental basis for their value other than the confidence of their owners is why I don’t go near any of them.
I would prefer to look at the underlying mechanism (blockchain) because this has some real use such as disrupting the banking sector.