What does Tesla’s U-turn on Bitcoin payments mean for the future of cryptocurrencies?

Tesla’s relationship with cryptocurrencies has been a stop-start rollercoaster. In February, the electric vehicle manufacturer announced it had purchased US$1.5 billion (£1.1 billion) of Bitcoin and planned to accept the cryptocurrency in future as a means of payment from its customers. The price of the largest cryptocurrency surged that day from just over US$39,000 to US$46,000, on its way to an all-time high of almost US$65,000 in April – and a paper profit of well over US$1 billion for Tesla.

Fast-forward a few short weeks and the situation has changed entirely. First came the news in late April that Tesla had sold 10% of its Bitcoin holdings, reportedly to demonstrate the digital currency’s liquidity.

And more importantly, Elon Musk has now announced on Twitter that Tesla has suspended purchases using Bitcoin amid concerns about the “rapidly increasing use of fossil fuels” used in mining the cryptocurrency. This has prompted a huge sell-off in the crypto markets, with Bitcoin plunging from around US$55,000 to the mid-US$45,000s, before recovering to around US$50,000 at the time of writing.

The concerns around bitcoin’s carbon footprint are hardly new. Its network is secured by “miners” using arrays of supercomputers to compete in very complex number-guessing games, which uses large amounts of electricity. As has been well reported, this is the equivalent usage of a medium-sized country – currently Egypt – and the power consumption can be followed in real-time here. Worse, much of this mining relies on coal-fired power in China, although many in the crypto industry contend that the impact is far more moderate than suggested.

Either way, it is difficult to believe that Musk and Tesla were not aware of these issues at the start of the year. And the fact that Tesla still intends to keep Bitcoin on its balance sheet makes the announcement even more confusing – both because it seems inconsistent with Musk’s fears about carbon emissions, and because Tesla’s investment could be damaged by the falling price of bitcoin. As it happens, the company’s share price has been fairly steady since the story broke.

Is the bull run ending?

A rising tide lifts all boats but the opposite can also be true. The concern for cryptocurrency investors is whether the downward shift in price marks the beginning of the end for the current Bitcoin bull run, which has seen the price rise roughly fivefold since October 2020. Prices in the whole cryptocurrency market have already tanked since Musk’s announcement.

Alternatively, is this simply another of the many historical bumps in the road as the new currency on the block aspires to become one of the largest in the world? In terms of its total aggregate market value, Bitcoin is currently just outside the world’s top ten currencies.