Why Musk denounced Bitcoin?

The value of Bitcoin crashed recently after Elon Musk made a very public announcement regarding the cryptocurrency. It came out of the blue and it left everyone surprised.

So in today’s Finshots, we look at the announcement itself and see why Elon Musk risked antagonizing millions of crypto investors all of a sudden.

The Story

In February of this year, Tesla announced that it had purchased $1.5 billion worth of bitcoin while also suggesting that it intended to accept Bitcoins as a mode of payment from people looking to buy its vehicles. This was a show of confidence by all accounts. And the value of the cryptocurrency soared.

But then, just last week, Elon Musk broke his promise. After selling about 10% of the company’s bitcoin holding he announced that Tesla had suspended purchases using bitcoin amid concerns surrounding the use of fossil fuels in mining. The price of bitcoin crashed and investors were up in arms. And while you might question the timing of the announcement, Musk was indeed pretty accurate with his assessment.

Mining bitcoin is expensive. Each participant in the network solves a mathematical problem to keep the network secure. And these computations are carried out using sophisticated computers that use inordinate amounts of energy. Reports allege that the bitcoin network consumes as much electricity as a medium-sized country (Like Egypt). And since miners predominantly operate in countries that offer cheap electricity by burning dirty fuel, it’s been a source of concern for many people in the ecosystem.

The only problem however is that Elon Musk knew all of this back in February. So why would he make such a public announcement only to retract a few months later? It doesn’t make any sense. In fact, many people now believe that he’s dabbling in market manipulation. That this was a deliberate ploy to affect the value of Bitcoin. However, considering Tesla has promised not to dump their bitcoin holdings yet, maybe there’s a different explanation.

One theory, in particular (from a Twitter user), is gaining interest. Unfortunately, it’s a bit difficult to wrap your head around this one. So we will have to take a minor detour before we get to the meaty bits.

Let’s start with Tesla and America’s environmental initiatives. Many states in the US mandate automakers to produce a certain number of clean energy vehicles or in other cases reduce CO2 emissions. If they don’t, the state penalizes them. So if you’re a traditional automaker who’s still struggling to put together the infrastructure needed to pump out energy efficient vehicles by the bulk, then you’re in for a rough ride. Thankfully, however, you do have a “get out of jail” card. If you can’t meet your quota, you can go to somebody who does.

For instance, consider Renewable Energy Certificates (RECs). These certificates or credits, as they are often called, prove that you’ve done your fair share in reducing the carbon footprint. And if you generate excess credits, beyond your mandated quota, you can sell them to others, who have trouble meeting their targets. You can make money off of this scheme if somebody is willing to pay up. Tesla, as you may have already guessed is in the business of renewables and since they’re a market leader of sorts, they get access to boatloads of RECs. RECs, they can sell to traditional automakers like Fiat-Chrysler and General Motors.

And this works well for stakeholders involved. The old companies now have to pay the likes of Tesla to avoid harsh penalties and Tesla has an added incentive to keep producing more energy-efficient vehicles. And if the old guard doesn’t fall in line and make the transition to EV, then they’ll have to keep paying their biggest competitor boatloads of money each year. It’s a huge disincentive.

In fact, Tesla made $428 million from selling RECs between April and June 2020. And while that may pale in comparison to the $6 billion they made in total revenues that quarter, you have to remember that the RECs come at no cost. They are pretty much pure profits. So it's kind of a big deal. Unfortunately, for Tesla, traditional automakers are catching up. They’re trying to meet the clean energy quota themselves and they may no longer need Tesla to sell them the coveted RECs. So analysts have been sceptical of Tesla’s prospects on this front.

But then in April 2021, something changed.

The White House asked the Environmental Protection Agency to study whether electric vehicles can generate renewable fuel credits. This is a bit different from the RECs that we just talked about. Since 2005, the US has also had a plan in place to reduce energy emissions. Under the U.S. Renewable Fuel Standard, oil refiners were expected to blend a certain amount of biofuels into their fuel mix. If they didn’t meet the quota, then they were expected to buy tradeable credits from those that did. These credits were called Renewable identification numbers or RINs. It’s like RECs, only in this case, it’s supposed to aid progress in the renewable energy market. And as of today, this market is dominated by ethanol producers who sell these lucrative credits to oil refiners across the US.

But with the White House now seeking a review, it might pave the way for the likes of Tesla to participate as well. The company already produces electricity from biogas. And a recent report from Reuters alleges that Tesla has an application pending with the Environment Protection Agency. If it goes through, Tesla could potentially start generating and selling RINs while also mustering billions in revenues. It’s an opportunity you simply can’t afford to pass up. So the story goes that Musk disowned Bitcoin in an attempt to reinforce his commitment to the environment. That this was all an elaborate ploy to sway the regulators at the EPA. It’s an interesting theory.

However knowing Elon Musk, maybe he’s just trolling people for the laughs. So yeah, those are the two explanations, and if you have a hot take on the matter, don’t forget to let us know on Twitter.

Until then…

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Correction: The draft has been updated to accurately reflect the true nature of Renewable Energy Certificates. In an earlier draft, we said producing zero-emission vehicles help you generate RECs. However, that is incorrect. Production of zero-emission vehicles entitle you to ZEVs (Zero Emission Vehicles Credit). The error is regretted.