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The price of bitcoin fell by 13.3% on Wednesday to close at $49,150. The cryptocurrency is volatile, and Wednesday’s fall was the sharpest single-day drop this year.

The following chart plots the daily change in the price of bitcoin in percentage terms.

Wednesday’s fall was the sharpest single-day drop this year.
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Wednesday’s fall was the sharpest single-day drop this year.

The cryptocurrency plunged after Tesla CEO Elon Musk tweeted that the company will no longer accept bitcoins as payments. “We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel," Musk said in a tweet.

Over the years, it has become more and more difficult to mine bitcoin. These days bitcoin farms with giant racks of computers are needed to mine bitcoins.

As Jacob Goldstein writes in Money – The True Story of a Made-Up Thing: “People started building special computers optimized to mine bitcoin. Then they started filling giant warehouses full of racks of those mining computers. The computers sucked up so much energy that miners began seeking out places in the world where power was cheap to lower their costs of mining. Vast mining operations sprung up in Iceland, Mongolia, and, especially, China."

Bitcoin mining ends up using a lot of electricity, which is generated by burning fossil fuels. Thirty-six percent of the world’s electricity is generated by burning coal, and 23% by burning natural gas.

As Bill Gates writes in How to Avoid a Climate Disaster: “Greenhouse gases trap heat, causing the average surface temperate of the earth to go up. The more gases there are, the more the temperature rises. And once greenhouse gases are in the atmosphere, they stay there for a very long time; something like one-fifth of the carbon dioxide emitted today will still be there in 10,000 years." Bitcoin mining adds to this pollution.

The trouble is all this did not become obvious as of yesterday. It has been well-known for a while. Given this, there seems to be more to Musk’s decision.

One reason could have been bitcoin’s price volatility. This is evident in the accompanying chart.

As Mark Carney writes in Value(s) – Building a Better World For All: “Cryptocurrencies are proving volatile short-term stores of value, exhibiting price fluctuations that can lead to gains or losses of 50% within months. Over the past five years, the daily standard deviation of bitcoin was ten times that of [the pound] sterling."

For instance, the price of bitcoin shot up 74% to $57,540 in the three weeks to 21 February. This helped Tesla make money on its bitcoin investments. In the March quarter, the company made a profit of $101 million by selling around 10% of its bitcoin holdings.

Volatility means that the price doesn’t always go up; it falls as well. The value of bitcoin halved to $3,503 from $7,038 in a little over three months to 10 December 2018. It is worth remembering here that a 50% fall wipes out a 100% gain.

In this scenario, if Tesla had been selling cars in bitcoin, its revenue and profit in dollar terms would have fallen for the portion of vehicles it managed to sell in bitcoins.

Stock market investors do not like earnings surprises, which selling cars for bitcoins can introduce. This seems like a more plausible explanation for Musk’s sudden love for the environment.

Also, it needs to be kept in mind here that the US treasury secretary Janet Yellen has been talking about a new regulatory structure for cryptocurrencies since being sworn into the position earlier this year. “There are issues around money laundering, Bank Secrecy Act, use of digital currencies for illicit payments, consumer protection and the like," she recently said. It is quite possible that Tesla is getting ready for a new regulatory structure.

Finally, the CEO of a publicly-traded company with a market value of more than $550 billion, offering views on a cryptocurrency in which his company has investments, influencing its price, is bad corporate governance.

If this isn’t front-running, one doesn’t know what is. It ends up influencing retail investors in the wrong way. And it’s surprising that the American financial regulators have not done anything about it. Possibly, a message to Musk has quietly gone out.

Vivek Kaul is the author of Bad Money.

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