Elon Musk, the chief executive of Tesla, recently announced his company had bought US$1.5 billion (almost A$2 billion) of Bitcoin. The announcement led to a flurry of enthusiasm and a quick surge in price for the controversial cryptocurrency.
This price bump has been good news for Musk in the short term. At one point, Tesla’s Bitcoin investment had gained more than US$1 billion in value. But can the enthusiasm be sustained? I think there is a good chance that over the next year the price of Bitcoin will drop towards its fundamental value, which is nothing.
If Bitcoin were to lose half its present value — which is not unlikely, given its extremely volatile past behaviour — Tesla will lose around A$1 billion. As Elon Musk owns about a fifth of Tesla, he would then be down A$200 million. In contrast, I own no Bitcoin so I will lose nothing, which means I will have done A$200 million better than Musk.
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Why Musk’s decision is a bad thing
Musk is not doing Tesla’s shareholders any favours. If they wanted to be exposed to the rise and fall of Bitcoin they could just buy some themselves. Now they have no choice; if they want to invest in Tesla electric vehicles, they are also vulnerable to the vagaries of Bitcoin.
The usual justification for making investments more diverse is that it can reduce risk. But buying the extremely volatile Bitcoin will make Tesla’s earnings even more uncertain.
Nor is Musk doing his fans any favours. As a “rock star CEO” with more than 40 million followers on Twitter, his musings are widely reported in other media.
By publicly endorsing Bitcoin, Musk may lead some of his fans to invest in this highly risky speculative asset. They may not be as well placed as a multibillionaire to absorb any losses on their investment. (To be fair, Musk has warned them not to invest their life savings.)
Nor is he doing the inhabitants of this planet any favours. The generation of Bitcoins (known as “mining”) uses vast amounts of energy to power specialised computers solving complex but useless mathematical problems.
Estimates vary as to how much energy they waste. Some studies suggest Bitcoin production uses more electricity than the whole of Argentina, Poland, Norway, or Switzerland. But even the lower estimates are that it results in more carbon emissions than Estonia. And if Bitcoin becomes more popular this will only increase.
What will the Bitcoin price do?
How likely is it that Bitcoin could lose half its value within a year? Well, it has form. After it peaked at A$24,000 in December 2017, it dropped to A$10,000 by February 2018. After recovering to A$16,000 in July 2019, it dropped to A$8,000 by March 2020.
Bitcoin may be the purest ever example of a speculative bubble. It follows in the footsteps of famous bubbles such as the South Sea bubble, the Dutch tulip mania, gold around 1980, the dotcom boom of 2000, and the US housing market before the global…