This morning, after weeks of Elon Musk tweets that drove up the price of cryptocurrencies, and the inclusion of the hashtag #bitcoin to his Twitter bio, Tesla announced that it had purchased $1.5 billion worth of bitcoin, and that it would begin allowing car buyers to use cryptocurrency to buy their cars. This news drove a fresh surge of buying into cryptocurrencies, sending bitcoin up another 13%, after already doubling in the last couple months. This news is raising concerns with investors, regulators, and environmentalists.
Bitcoin and Climate Change.
Cryptocurrencies like bitcoin operate via blockchain and a unique process that essentially incentivizes the record-keeping and liquidity of the market by rewarding computer operators with the occasional coin. This network of bitcoin “miners” run their computers 24/7 and together maintain a complete ledger accounting for all the transactions and coins. After many hours of computing work, if they are fortunate, they will be rewarded with a bitcoin. Bitcoin miners come in many shapes and sizes–from a single computer left running in a person’s basement, to massive warehouses of servers with their own power grid and fiber optic trunk lines. Many of these mining operations are situated in northern regions, or even beneath bodies of water to help keep the temperatures under control due to the massive power consumption and computing heat generated.
The total power consumption of bitcoin alone has been estimated to be equivalent to the entire nation of Switzerland. This estimate remains an educated guess because there is no way to attribute specific energy usage to bitcoin mining. We know how much energy some of the large server operations use, but since anybody with a computer in their home can mine bitcoin without registering anywhere, there is no way to track all energy use. In fact, many miners use malware installed on the computers of unknowing strangers to harness their computing powers; while you surf the web, you might be unwittingly earning someone a bitcoin. Just last week, Business Insider reported that German authorities had seized $68 million in bitcoin from a man who had allegedly run such an operation.
This distributed network approach is integral to the functioning of cryptocurrencies. The advantage is that a currency is created which is not tethered or manipulated by any government or corporate entity. The mining incentive allows the currency to get off the ground without any one entity in charge of its operation. The hazard, however, is one we are already beginning to witness. As the value of bitcoin appreciates, its power consumption grows exponentially, and has already stressed local power grids. Last month Iran outlawed bitcoin mining after power blackouts, although many contest that they are scapegoating the cryptocurrency to excuse insufficient infrastructure. Pakistan, Egypt, Algeria, Bolivia, and Nepal are among the countries banning bitcoin mining, while others like Canada, China, Russia, and Saudi Arabia are trying to legally restrict mining (although such regulations are quite difficult to enforce except to limit large-scale operations). Many countries have concerns not only because of the power consumption, but by the use of criminals who are attracted to its anonymity. Cryptocurrencies have been used in the trafficking of drugs, humans, and weapons.
Simply put, the greater the value of bitcoin, the more power it will demand, because an increasing number of miners will attempt to capitalize, while the attainment of the coin becomes statistically more difficult by algorithmic limitations. When you consider that in addition to Bitcoin, more and more new cryptocurrencies keep arising, and each new issue has its price driven higher by speculators, it would seem conceivable that left unchecked, an uncomfortably large portion of the world’s electricity will be consumed by cryptocurrency mining, not to mention the physical resources to construct the computers and networks. In a time when society has made such great strides in power efficiency, this is a terrible blow to environmentalists.
Tesla’s speculative fury.
The stock of Tesla has gone from $44 in April of 2019 to $863 today. That’s a nearly 2,000% gain in under two years. The company’s total market cap now exceeds $800 billion, making it larger than all the other domestic automakers combined, despite having a small share of the market. It trades at 1,350 times earnings. This price has been achieved in part by Robin Hood traders; it’s a darling stock of the average investor. All this market cap despite the company being in a dire position of nearly running out of operating funds not long ago, and having manufacturing problems due to the pandemic. That’s not to suggest the stock is over-valued. Only time will tell in that regard, because if their earnings continue to grow at the pace of recent quarters and they take market share and make other innovations, they might well grow into this valuation (Amazon has managed such a feat).
A couple years ago, when Tesla was simultaneously having cash flow and production problems, the stock began surging dramatically. Elon Musk tweeted that the stock was overvalued, which caused many to speculate they would be forced out of business by insufficient cash. The stock fell precipitously, but was immediately driven back up and has mostly climbed since then. Elon’s unpredictable tweets have caused large movements in the stock, leading to investor outcry and SEC investigations over alleged harm to shareholders and price manipulation. The settlement of one of those investigations forced Elon Musk to resign his seat as a Tesla board chairman, but retain CEO status.
Given this history, both investors and regulators will scrutinize the company’s investment in bitcoin. Although Tesla’s SEC filing was today, the purchases of bitcoin had already been previously made. So it’s likely Tesla already owned the bitcoin while Elon Musk was promoting the cryptocurrency. In financial circles, this is known as “talking one’s book”; encouraging others to buy something you already own, hoping it will drive up the price. This is not illegal, although some find it ethically embarrassing when such ownership is not previously disclosed. Whether the knowledge that Tesla would announce its acceptance of bitcoin as currency could be considered insider trading, remains uncertain.
Investors in Tesla’s stock now have reason to be concerned that the company is using earned income to make risky commodity bets. Tesla has faced numerous cash flow problems. Its manufacturing facilities in China have faced uncertainties due to covid and strained trade relations. And the pandemic has recently been causing shortages in raw and manufactured materials (GM announced last week it was shutting down plants because of a chip shortage that had been hitting all car manufacturers). So might Tesla’s future be in jeopardy if manufacturing was stalled and the value of bitcoin suddenly took a tumble? If they had a cash squeeze, they could be forced to liquidate their bitcoin at a loss of hundreds of millions of dollars (if bitcoin were to decline). Also, could Elon Musk be taking this gamble on bitcoin as an end-around, desperate grab for cash, knowing that his near-term cash-flows are endangered. (See screenshots from SEC filings below).
Environmentalists should shudder at Tesla’s marriage to bitcoin. Many hailed Elon Musk as a potential savior of the environment, as he has nearly single-handedly driven the shift from fossil fuels to renewable energy in automobiles. Other automakers have scrambled to keep up with his innovation. In January, GM announced it pledged to eliminate production of gas-powered vehicles by 2035. Musk is inarguably one of the greatest scientific-minded entrepreneurs of our lifetime. But while many hoped he was motivated by saving the planet, he has become increasingly accused of only capitalist goals. Some on Twitter have suggested he has gone from Tony Stark to Lex Luthor. If you think of him as Tony Stark, you might hope that his investment in bitcoin is business savvy and will help him earn money to fuel further world-saving innovations, and that maybe he intentionally hopes to put stress on the power grid to increase the demand for renewable energy. But if it turns out he is Lex Luthor, he could be manipulating traders for personal gain or a desperate cash grab for a floundering company. Or—and this is less likely and more deviously imaginative on my part—Lex Luthor might be finding new ways to threaten the planet via rabid power consumption, or to make his charging stations earn more money, or to create more climate change in the immediate future so his products are more desperately needed.
Electric cars are good for the environment. Cryptocurrencies are harmful. Is Elon Musk Tony Stark or Lex Luthor? His motives are unknowable, so the answer can be determined only by your personal beliefs and faith in the man. Such is the cult of personality.
