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Is Tesla’s bet on bitcoin a stroke of genius or just a rush of blood?

Tesla sent financial markets into meltdown on Monday when Elon Musk announced that the firm bought US$1.5 billion of the cryptocurrency ‘bitcoin’ in January.

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Why have Tesla and bitcoin risen so much?

As the automotive industry faces increasing pressures to lower their carbon emissions, Tesla has capitalised on changing market demands to cement its place as a market leader in the electric vehicle market. Tesla’s success has coincided with the change in its perception; the firm now heralded as the most innovative car manufacturer in the world and expected to dominate the zero-emission category for many years to come.

Cryptocurrency has been a widely discussed in the financial world for many years now. If you invested US$100 in bitcoin five years ago, you would be $150,000 richer today! Avid supporters believe it can establish itself on a similar footing as major currencies such as the US dollar, whilst bitcoin has been heavily criticized by others.

The initial excitement around bitcoin stemmed from the fact it was the first cryptocurrency to extensively use blockchain technology. This feature allows the supply of the currency to be distributed across many different networks worldwide. This is of significance because it means the value of the currency cannot be manipulated by major governments. This is especially important in the current economic climate, as we see central banks across the world adopt wave after wave of stimulus measures to kickstart the economy. Whilst the intentions are good, the by-product will likely be rampant inflationary pressures. This is where the appeal of bitcoin becomes more apparent, as many a legitimate hedge option against inflation. According to recent data, this argument is well founded. During the latter stages of 2020, bitcoin prices have moved in a similar fashion to the price of gold, which has been long perceived as a ‘safe-haven’ asset. This large numbers flock to bitcoin even before Tesla’s investment

Market Bubble?

The spectacular rise of both bitcoin and Tesla has played a role in supporting widespread fears of a market bubble. This latest announcement perhaps sums up the general sentiment in the markets of late. Some experts argue that current market conditions are reminiscent of those highs that preceded the dot.com bubble crash that occurred in the late 1990s/2000s.

This is understandable given that equity valuations have stretched ludicrously beyond their fundamentals. The role of speculative buying is apparent given that bitcoin has no intrinsic value and Tesla has an exceptionally hefty price-to-earnings ratio, which could potentially undo their recent success.

Does investment in bitcoin go against Elon Musk’s drive for clean energy?

Once described as ‘rat poison’ by Warren Buffett – one of the most prominent investors of all time – the name is perhaps fitting when you look at the effect of bitcoin on the environment. Latest figures suggest it requires an alarmingly high amount of electricity to ‘mine’ bitcoin. Mining bitcoin, which essentially means creating extra supply of the currency, consumes up to 78 terawatt hours per year.

To put this in perspective, this is just under  the total energy consumed by the entire population of the UK in 2020. In terms of carbon emissions, the numbers do not make for better reading. The carbon footprint of bitcoin was identical to Norway in 2020. long-lasting damaging effect on the environment has been a longstanding criticism of bitcoin. This directly contrasts against the environmental values Elon Musk wants to promote.

As climate change is now at the forefront of geopolitics, Musk’s investment in bitcoin seems hypocritical at the very least.

Will bitcoin stay high?

Another issue with bitcoin is its volatility. The cryptocurrency produced enormous returns in 2017 as retail investors got excited by the promise of bitcoin in its earlier stages. This optimism was short-lived as the price crashed back to lows once the market corrected itself.

The revival of bitcoin only gathered new momentum in October 2020, when PayPal announced it would accept cryptocurrency as a legitimate tender on their platform. Bitcoin’s credibility as a viable currency has been thrown into question numerous times, but Tesla’s investment marks a significant milestone for . Since then, two major US financial institutions have followed suit by integrating it into their platforms. Investment bank BNY Mellon and Mastercard are the latest to have jumped on the bitcoin bandwagon. If bitcoin can win over its sceptics, it could have a commanding presence in financial markets for many years to come.

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