That love affair between Elon Musk and Bitcoin? It’s just become complicated.
It’s been a rough couple of days in crypto world, with prices of most major crypto assets plummeting — Bitcoin, in particular, was trading at about $59,500 last Tuesday, only to drop as low as $42,000 on Monday.
While the Tesla CEO cannot possibly be entirely to blame for the price action, Musk did likely contribute with a series of tweets in which he first announced that Tesla would stop accepting Bitcoin as payment due to environmental concerns, then indicated that he’s looking at meme coin DOGE as possible replacement for Bitcoin at Tesla, and finally threatened that Tesla might actually sell the Bitcoin it owns.
Tesla’s announcement in March that the company would start accepting Bitcoin as payment, and that it bought $1.5 billion worth of Bitcoin as an investment pushed the crypto market forward. It signaled a new era for cryptocurrencies, one in which major corporations might start hoarding them on their balance sheets. It’s no wonder, then, that the market reacted poorly when Musk went the other way.
For those who have been in the space for a long time (say, 2014), it may bring to memory a time when major retailers started accepting Bitcoin as payment, only for the trend to die down further along the line, largely due to Bitcoin’s volatility. In fact, despite the fact that crypto markets have evolved immensely in the past six or seven years, many aspects of Musk’s bumpy ride on the Bitcoin bandwagon are merely history repeating.
It’s impossible to know what’s in Musk’s head; perhaps the man knows more than he lets on on Twitter. But his public comments indicate a fairly superficial understanding of the crypto space, as pointed out by many experts and insiders.
Three points he’s made stick out. One, he’s worried about Bitcoin’s environmental impact. It’s true, Bitcoin is an energy hog. The process of mining bitcoins currently uses vast amounts of of electric power, and some of that electricity is coming from “dirty” sources, such as coal. But this isn’t new. It was well-known in March, when Tesla first bought $1.5 billion worth of Bitcoin — in fact, it was well-known, documented, and argued about for many years.
Musk also made a point that Bitcoin is actually “highly centralized, with supermajority controlled by handful of big mining (aka hashing) companies.” Also true, also an issue, and also well-known for years.
Bitcoin is actually highly centralized, with supermajority controlled by handful of big mining (aka hashing) companies.
A single coal mine in Xinjiang flooded, almost killing miners, and Bitcoin hash rate dropped 35%. Sound “decentralized” to you?https://t.co/Oom8yzGRNQ
— Elon Musk (@elonmusk) May 16, 2021
These two points and the arguments around them were never resolved; Bitcoin diehards will tell you, in a nutshell, that neither issue is as bad as it seems, and that there are ways to improve. Others will tell you that there are other, greener alternatives — though Bitcoiners will snap back that they aren’t as secure or as decentralized as Bitcoin.
Another point Musk has made is what caused a flurry of copypasta answers and quite a bit of ridicule. If we could just fix DOGE to be faster and cheaper, he argued, it would be the best cryptocurrency.
Ideally, Doge speeds up block time 10X, increases block size 10X & drops fee 100X. Then it wins hands down.
— Elon Musk (@elonmusk) May 16, 2021
The problem is, the entire cryptocurrency space has been bashing its head over this exact problem for a decade now. Litecoin, Ethereum, Cardano, Dfinity, Ripple, Polkadot, Avalanche, Solana, Polygon, Cosmos — that’s a small sampling of the best projects that have tackled the issues Musk mentions, with a varying degree of success. They’ve hired the smartest people in cryptography to solve some of the hardest problems in the field in order to do that. And they’ve had success — though none of them has yet emerged as a clear winner.
Founder of decentralized exchange Uniswap, Hayden Adams, ridiculed Musk’s tweet with an example anyone can understand. If we could make Tesla batteries last 10 times longer, with 10 times faster recharge times, at a fraction of the cost, wouldn’t that be great? Yes, but this is incredibly hard to do, and it may take many years of research to get there.
Musk’s comment on DOGE block size (he’s referring to the building blocks in a blockchain — they’re files containing lists of transactions on the network) brings to mind Bitcoin’s great block size debate, which raged in 2017. The short of it is that you cannot just speed up block time and increase block size and “fix” a blockchain. You can’t just tweak some parameters and get a massively better result. There’s a lot of intricacies here, but you don’t have to trust me — any expert will tell you that.
Another funny (or sad, if you own Bitcoin and are currently looking at its price) thing about this kerfuffle is that Tesla accepting bitcoins as payment was never a great idea. It may be good for the space, it’s a nice option to have, but Bitcoin is still quite volatile, and most people don’t even pretend to want to use it for payments. People hoard Bitcoin as they would gold. Tesla hasn’t made the numbers public, but I doubt a great number of Tesla vehicles were purchased with bitcoins in the past two months. While it is significant from a PR perspective, the fact that Tesla is no longer accepting Bitcoin for payments is largely irrelevant for the space.
It all points to Musk being a bit superficial about his crypto research, which is worrisome. The fact that his tweets can seemingly move the markets by a lot is not a great look for crypto.
It’s not all bad. Again, the man may know more than he lets on. And historically, he’s shown that he’s a fast learner. One thing that would certainly be wrong to do is to fall into the rabbit hole of arguing with crypto Twitter, which is a notoriously taxing endeavor. Instead, hopefully he sits down with the smartest people in the space and finds out what he can really do to improve it.
To clarify speculation, Tesla has not sold any Bitcoin
— Elon Musk (@elonmusk) May 17, 2021
Oh, and if you were wondering — while I was writing this, Musk clarified Tesla hasn’t yet sold any bitcoins. The love affair between Musk and Bitcoin is still going on, I guess, though they’ve decided to see other people as well.
Disclosure: The author of this text owns, or has recently owned, a number of cryptocurrencies, including BTC and ETH.