A change of heart and Bitcoin comes crumbling down.
To be fair, it's no ordinary person's heart. It belongs to Tesla CEO Elon Musk, a tech trailblazer and arguably the most prominent cryptobacker. His endorsement, mainly via tweets and jokes, has helped fuel Bitcoin as well as its parody version Dogecointo record highs.
Bitcoin prices soared 20% after Musk added the hashtag #bitcoin to his Twitter bio in January and another 15% two weeks later, when Tesla said it had bought $1.5 billion worth of Bitcoin and that it would start accepting the digital coin as payment for its electric cars.
So, when Musk took an abrupt U-turn on Wednesday and tweeted that Tesla would stop taking payment in the digital currency because mining the cryptocurrency damages the environment, a rout in Bitcoin prices, which tumbled as much as 15%, was to be expected. A mostly tweet-driven rally gives way to a tweet-induced crash.
Such wild swings show that, despite an influx of corporate and institutional interest in Bitcoin over the past year, the digital coin is far from being the mature asset that its aficionados claim it to be. It remains an asset for speculation that's sensitive to the utterances of a single individual.
Musk a roadblock to Bitcoin's glory
Bitcoin has had a painful history laden with boom and bust, and Musk and his legion of fans in the cryptocommunity, who take his tweets at face value are only undermining the cryptocurrency's efforts to gain wider acceptance as it looks to revolutionize modern finance.
Musk's sway on Bitcoin should be seen as a cautionary tale that the digital coin is not the independent, decentralized, reliable inflation hedge, safe haven or digital gold that its proponents would like people to believe. In fact, the SpaceX founder "is kind of like the central banker of crypto," as Bloomberg's Tracy Alloway put it, who can swing sentiments, often with just one tweet.
Musk's other cryptolove, Dogecoin, is suffering a similar fate. Over the past months, the self-anointed "Dogefather" has been assiduously propping up the digital coin, which began as a social media joke, pushing it to record valuations, only to call it a "hustle" on a popular US comedy sketch show last week.
Musk's irresponsible banter caused a lot of pain to retail investors as Dogecoin lost a third of its value. As if to make up for their losses, Musk called on his 54.5 million Twitter followers to vote on whether Tesla should accept payments in Dogecoin after SpaceX said it was already doing so. His fans responded with an overwhelming yes and Dogecoin recovered some of the lost ground.
Banks and asset managers gearing up or planning to sell crypto-linked products to customers may want to include an extra item to their already long list of risk factors: Investments in cryptocurrencies may be subject to extreme risk, thanks to tweets or jokes by Elon Musk.
Not walking the talk
Musk deserves credit for highlighting Bitcoin's massive carbon footprint. A currency that requires more energy than whole countries to keep going, much of it from highly polluting coal, has no right to be the currency of the future. Maybe a bashing from Musk would push Bitcoin backers to look for less energy-intensive mining technologies or greener energy alternatives.
What exactly dawned on Musk to bring about this change of heart is not clear. After all, climate change activists have been flagging Bitcoin's environmental drawbacks for years now.
Could it be that Musk has got bored of Bitcoin, that the digital coin has become so big that it's no longer fun to prop it up? Does it lack the underdog vibe that Dogecoin has, or has the Dogefather's love for Dogecoin gotten the better of his fondness for Bitcoin? Musk tweeted yesterday that he was working with Dogecoin developers to "improve system transaction efficiency" and that it was "potentially promising."
It's difficult to buy the environment argument at face value. If Musk was actually bothered about the planet, then he would not have ignored the obvious contradiction of a clean carmaker investing in Bitcoin in the first place.
By the way, Tesla continues to hold its investment in Bitcoin. The digital coin stored in Tesla's treasury does not make it any greener than when it's used for transactions. Not accepting Bitcoin is hardly a sacrifice, as few were actually parting with their Bitcoin to buy a Tesla.
There is apparent hypocrisy in Musk's latest volte-face. Bitcoin fans should look for a more reliable brand ambassador if their grand plans for overhauling the current financial system are to be realized.