Could Elon Musk’s Bitcoin U-turn destroy the cryptocurrency market?

Is it possible the Tesla founder’s volte-face on environmental grounds will prove a turning point for the broader crypto market? Ben Chu investigates

Eliminating cryptocurrencies might not be straightforward, even if national authorities were so minded (Getty)

Elon Musk performed a neck-snapping U-turn on Bitcoin this week.

Earlier this year the world’s second richest man declared himself a true believer in the merits of the cryptocurrency and ploughed hundreds of millions of dollars of Tesla’s spare cash into the digital tokens.

Tesla also announced that it would accept payment for its electric vehicles in Bitcoin, prompting a surge in its traded price as users and speculators sensed a mainstream breakthrough moment for the cryptocurrency.

Yet on Thursday Musk conceded on Twitter that the environmental damage that is a by-product of the “mining” and transactions in Bitcoin was a serious concern and said that Tesla would be “suspending” allowing people to purchase Teslas with Bitcoin.

The price of the world’s most famous cryptocurrency duly took a hefty tumble – though it remains well above its value at the start of 2021 and some six times higher than it was at the start of 2020.

Yet could Musk’s volte face on the acceptability of the currency on environmental grounds prove a turning more broadly – perhaps resulting in regulatory action against cryptocurrencies that turns the boom of recent years into bust?

The former senior UK financial regulator Adair Turner suggested as far back as 2018 that there was a case for “banning cryptocurrencies entirely” given their harmful environmental impact and questionable social and economic value.

And that was when Bitcoins estimated electricity consumption was around 38 terawatt hours a year. Now it’s up 150 terawatt hours annually.

In the context of a planetary political push towards net zero carbon emissions the soaring carbon footprint of Bitcoin seems increasingly problematic.

The UK government changed the Bank of England’s mandate in March to explicitly include environmental sustainability and net zero compatibility.

Financial regulators like the Bank are likely to come under increasing pressure from activists to do something about these carbon-hungry cryptocurrencies.

“Those speculating on Bitcoin should seriously be asking themselves what is more likely: use for it turns up that creates some actual value [or] governments gently put it out of existence,” says the head of the Resolution Foundation think tank Torsten Bell.

“My money is that [the second] is significantly more likely.”

The Oxford economist Simon Wren-Lewis responded to the Musk announcement by calling for the “elimination” of Bitcoin.

“The first step is to agree it needs to be eliminated. Then work out how,” he said.

But elimination might not be straightforward, even if national authorities were so minded.

Despite the currency connotations of its name, a Bitcoin is more like a digital asset, and thus a form of property. It’s not clear what grounds any non-authoritarian government would have for banning people owning or trading such assets.

However, where regulators could undermine the use and value of the tokens is by proscribing their use in the broader regulated financial system.

This is a route that the Chinese government has gone down in recent years. Russia has made Bitcoin’s use as a payment illegal. There are also restrictions on its use in Turkey, Vietnam, Bolivia, Colombia and Ecuador. The Indian government is considering following suit.

The Bloomberg commentator Joe Weisenthal argues that limiting regulated financial institutions from interacting with cryptocurrency exchanges would be “a massive blow, crippling the price and the appeal”.

One of the arguments of Bitcoin bulls is that the tokens will, in time, become a global reserve asset with central banks and blue chip companies all competing to buy them. And given Bitcoin’s (ultimate) fixed supply of 21 million coins, this would, according to this logic, push its price into the stratosphere.

If regulation were to wipe out any prospect of this mainstream institutional uptake there would, then, logically be serious implications for Bitcoin’s value.

Another way regulators and governments could conceivably clamp down on the industry would be to ban the highly energy-intensive “mining” of Bitcoin.

And there are some signs that this might already be happening. Around 65 per cent of Bitcoin mining takes place in China, with a large proportion of that happening in Inner Mongolia where electricity is often generated by coal-fired power stations.

In March the Inner Mongolian government, under pressure from Beijing to reduce its carbon emissions, ordered the shut down all of the province’s cryptocurrency mining operations.

The environmental consequences of Bitcoin mining were well known and extensively publicised before Musk’s statement this week.

It’s possible that they were new to the erratic Musk. Yet some have speculated it’s also possible the Tesla founder – or those around him – picked up signals that the Biden administration in Washington intends to use its various regulatory powers to clamp down on Bitcoin on environmental grounds and that they wanted to move ahead of that risk, especially as Tesla’s share price is down some 30 per cent since its February peak.

If this is right then Musk’s U-turn might be remembered as less a cause of a cryptocurrency market collapse than a symptom of it.

Of course, it would be premature to pronounce the demise of this movement. And some crypto evangelists insist the value of these currencies derives from their independence, not dependence, on governments and traditional financial institutions, central banks and regulators.

But if the global regulatory attitude does turn hostile, as many expect, that theory will receive a rigorous real-world test.