Will Tesla’s reversal on bitcoin push investors into other cryptocurrencies?

Yesterday Elon Musk, CEO of Tesla, tweeted that his company was suspending the acceptance of bitcoin as payment for its vehicles due to the environmental impact of mining. Bitcoin mining involves the solving of complex mathematical puzzles done by sophisticated computers. This requires a large amount of electricity, which takes a toll on the environment if it is generated using fossil fuels.

Tesla had announced in February 2021 that it had invested $1.5 billion in bitcoin and in March 2021 it announced that it would start accepting payment for its cars in bitcoin. Other US corporations such as Paypal and Microstrategy have also adopted bitcoin in their operations or business. The shock reversal of stance by Tesla, may slow down the acceptance of bitcoin by large institutions around the world and act as a drag on the price of bitcoin.

“Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at a great cost to the environment. Tesla will not be selling any bitcoin and we intend to use it for transactions as soon as mining transitions to more sustainable energy. We are also looking at other cryptocurrencies that use less than one percent of bitcoin’s energy/transaction,” the statement tweeted by Musk said. The tweet sent bitcoin spiralling downwards by around 17% before recovering a little this morning. The tweet may also spur a shift towards more environment-friendly cryptocurrencies.

Ethereum, the world’s second largest cryptocurrency by market capitalization is one such possibility. It is in the process of transitioning from proof of work to proof of stake, a system that is less electricity intensive. Ethereum has a market capitalization of around $465 billion compared with $959 billion for bitcoin. “Ethereum 2.0 will move Ethereum away from proof of work to a different validation method, which will lower its carbon footprint significantly. So for people who just want a crypto to trade that uses less fossil fuel energy, it may be attractive for a while,” said Vikram Rangala, chief operations officer, Zebpay, a cryptocurrency exchange. However Ajeet Khurana, Patron, Genezis Network, emphasized that bitcoin’s own electricity usage is cyclical. “Bitcoin has an in-built safeguard in terms of electricity usage. The usage shoots up when the price rises rapidly and miners prioritize output. When the price flattens or falls, mining falls because the electricity costs become prohibitive for high-cost miners,” he said. “Other cryptos such as ethereum can turn out to be more environmentally friendly. However, ethereum’s transition to proof of stake has not yet completed and hence it is too early to speculate on whether it will hold a decisive edge over bitcoin in terms of environmental impact,” he said. Ethereum has risen faster than bitcoin over the past year (around 20 times compared with 5 times for bitcoin). However, it, too, corrected after the Elon Musk tweet. Ethereum is down 7.68% over the past 24 hrs.

Financial experts have so far not moved their clients’ money on the news of the Musk tweet. Amit Kumar Gupta, a New Delhi-based portfolio manager at Adroit Financial Services Pvt. Ltd, a Sebi-registered portfolio management firm, said more clarity needed to emerge on alternatives. “We trimmed our (non India-based) HNI clients’ positions in bitcoin last month. We’ve taken out 60% of the invested money so far from the overall allocation and balance 40% is left. We did so because of potential regulatory concerns cropping up in the US. However, we are not cutting exposure further on the back of this news. On a broader level I do feel that there is a possibility of erosion of faith in bitcoin and more environmentally friendly cryptos could slowly displace it. However it is too early to say which ones, when and how. We haven’t recommend cryptos to our Indian clients due to regulatory overhang,” he added.

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