While the value of cryptocurrencies continued to grow astronomically, it came crashing down to earth after Tesla’s sudden u-turn from using bitcoin as payment. However, experts think this will hardly undermine its potential as mainstream investments and payment means.
Tesla boss Elon Musk sent a shockwave through the crypto markets. In a roller coaster ride, Musk took a sudden sharp turn on his opinion on cryptocurrencies, after which, major digital currencies, bitcoin and ether, fell as much as 30% and 45% overall respectively. Tesla hit the brakes on accepting bitcoin as payment, just months after stating Tesla would accept bitcoin payments and allegedly purchasing $1.5bn of the digital currency to support this. Following this, nearly $1trn was wiped off the market capitalisation of the entire crypto sector. Bitcoin hit a three-month low of $30,066, more than 50% down from its record high of $64,895 in April. Ethereum dropped nearly 57% to $1,850, its weakest level since late January.
Not only did the bitcoin crash trigger a selling spree in the cryptocurrency world, forcing several traders and crypto enthusiasts to offload their crypto assets, but companies are revaluating taking crypto as a payment method.
The key driving factor in the price volatility was Musk’s tweets. With over 55 million followers, Musk indeed shakes the market every time he posts something about cryptocurrencies on Twitter. His comments about Dogecoin caused the price to both skyrocket and plummet. While Tesla holds over $1.73bn in bitcoin, the reason for withdrawing from bitcoin payments was down to the harmful impact fossil fuel has on the environment. “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment,” he said, adding that mining involves the use of “coal, which has the worst emissions of any fuel.”
Tesla & Bitcoin pic.twitter.com/YSswJmVZhP
— Elon Musk (@elonmusk) May 12, 2021
Despite this hard line on cryptocurrency, Musk is not condoning digital assets for good. He stated Tesla will hold on to its bitcoin and will begin using the currency again when it transitions to sustainable energy. Tesla will also explore the market for cryptocurrencies using just 1% of bitcoin’s energy usage per transaction. As a result, other firms taking cryptocurrencies as payment might come under pressure from environmental groups to withdraw, just as banks and funds have been pressurised to disinvest from fossil fuels. While it wouldn’t be surprising if this put question marks on the viability of using bitcoin for payment transactions, experts in the crypto world see it as yet another step in its evolution to becoming more mainstream.
Salamantex CEO Rene Pomassl said, “When you consider an estimated 21 million people in the US alone now hold cryptocurrency, the shift to being able to pay for goods and services with these assets is a natural evolution. Payment is a central element of the digital transformation taking place.
“Tapping into this growing market means setting your business up for new services and customers and the popularization is only set to continue in the coming years.” Pomassl believes that payment platforms must offer as much flexibility as possible “to allow users to transact with a cryptocurrency that meets their standards in this regard.”
Bitcoin’s coal connection
The concerns around bitcoin’s carbon footprint are hardly new. It’s mined by using arrays of supercomputers using large amounts of electricity, equivalent to the usage of a medium-sized country like Sweden or Malaysia, according to the Cambridge Bitcoin Electricity Consumption Index. A lot of this mining relies on coal-fired power in China. Nevertheless, there are many arguments to suggest that its impacts are not as bad as often thought and experts say that there are also many alternatives and upcoming improvements in the pipeline.
Wirex CEO Pavel Matveev believes that mining doesn’t necessarily mean that it requires lots of non-renewable energy. He said, “One of the most unique things about bitcoin mining is that it can be done from anywhere in the world, which opens a lot of doors when it comes to energy options. Bitcoin miners are often able to utilise different energy sources that aren’t easily accessible for other businesses.”
He further highlighted that miners are resorting to hydropower, and around 50% of bitcoin mining in China is done during the wet season.
Matveev also suggested that companies may accept other cryptocurrencies which are more environmentally friendly instead. “Even if some are wary of the energy bitcoin mining requires, there are plenty of other cryptocurrencies available that use very little energy and still offer all the benefits of digital currency, such as quicker transactions and lower remittance fees,” he added.
There are a multitude of cryptocurrencies with far stronger sustainability credentials, including names like stellar, ripple and Cardano as well as alternate coins that are produced solely from solar power. Cryptocurrencies such as Nano use energy-efficient Open Representative Voting protocols, which allow for minimal energy use, and green digital coin Chia is farmed on the unused storage of the user’s laptop, desktop or corporate network.
In addition, the upcoming upgrade to the Ethereum network is expected to be more sustainable. It will use a ‘proof-of-stake’ (PoS) protocol which gives mining power based on the percentage of coins held by a miner instead of the current ‘proof-of-work’ (PoW).
In the case of PoW, transactions can take up to ten minutes during which supercomputers require a colossal amount of electricity. When a new block is created, it contains different transactions within it which must each be independently verified. For the bitcoin network to achieve this without a third party, somebody must use their computational power to solve a cryptographic algorithm. Following this, the transaction is posted to the public blockchain for everybody to view.
However, what makes PoS more sustainable is the individual that creates the next block is based on the number of coins the person has for the particular blockchain they are attempting to mine. In short, validators don’t use up that much electrical energy nor do they require high computing power to complete the validation process.
Co-founder of the PoW-based Ethereum blockchain Vitalik Buterin has projected that the new Ethereum upgrades around the PoS protocol is due beginning of next year and would only use 1% of the energy currently consumed by the smart contract blockchain.
Tellingly, cryptocurrencies that are based on PoW are not using energy very effectively, but VP capital founder Viktor Prokopenya thinks a shift is coming. Making an analogy between the digital asset and automobiles when they first came out, he said, “One hundred years ago, people made the first car. Those cars had very big carbon emissions, but that did not mean we stopped creating cars – we improved the technology. Society has now created a zero-emissions car, and we are moving towards a world where all cars will be clean. Cryptocurrencies are evolving in the same way.”
Prokopenya added that the technology is slowly evolving and these hurdles will hardly dampen the industry. “It will not take us a hundred years to develop clean technology, as it did with the automobile,” he continued. “The ideas are already there, and this problem will disappear in five years.”
Bitcoin – a bust or a buy?
While some remain bullish about using crypto as payment, not all are convinced. One key factor to be taken into consideration is that the digital asset is simply too volatile. London Diamonds managing director James Sanders said, “Being paid in cryptocurrency for the service or product you provide might well become the norm in the future, but their volatility presents an additional level of risk that most retailers will not be prepared to take. If your margins are tight, you cannot take the risk of being paid in a currency that might collapse 30% overnight based on someone’s tweet. It’s one thing investing, or let us be more accurate, speculating on cryptocurrencies, it’s another to be paid in them.”
Seconding Sanders words, Digital River chief payments officer Eric Christensen believes digital assets are unpredictable and consumers might refrain from them due to uncertainty in taxes and fees. “Imagine how upset consumers might be to learn their £50 purchase now costs £150 due to the volatility of the currency? Companies are starting to move into that space to mitigate the volatility, but that’s just another layer of complexity a brand would have to manage with cryptocurrency as a payment option,” Christensen detailed.
Furthermore, digital assets are still in its early stages. Christensen said, “The fact Tesla is pulling back shows cryptocurrency is not yet ready for mass adoption.” But, this does not mean digital assets will not continue to grow. Christensen added that “if enough customers aren’t willing to use cryptocurrency as a payment option, there would not be enough incremental revenue to justify the expense of managing it.”
China’s crackdown on crypto
While the environmental impact pointed out by Musk helped cause the market to plummet, another trigger for the crypto shake-out was China’s move to ban financial and payment institutions from providing cryptocurrency services.
The price fluctuations “seriously violate people’s asset safety and disrupt normal economic and financial order,” the People’s Bank of China said. The notice warned consumers against wild speculated trading, adding that the “losses caused by investment transactions are borne by the consumers themselves,” since Chinese law offers no protection to them. It reiterated that providing cryptocurrency services to customers and crypto-based financial products was illegal for Chinese financial institutions and payment providers.
It’s worth noting that China powers nearly 80% of the global cryptocurrency trade.
China is hardly alone in being wary of the coin. Bitcoin seemingly is biding its time even in the US as recently, the Securities and Exchange Commission (SEC)’s Division of Investment Management issued a statement regarding mutual funds taking positions in bitcoin futures. It said concerns over a lack of oversight and the potential for investors to be damaged are still very much alive citing “lack of regulation” and the “potential for fraud of manipulation.”
SEC further pointed out the concern with liquidity. “The areas identified related to substantive requirements regarding valuation, liquidity, custody, arbitrage mechanisms for exchange-traded funds (“ETFs”), as well as potential manipulation and other risks associated with cryptocurrency-related markets,” the watchdog said.
Additionally, the US treasury called for stricter crypto rules. According to a new report from the US Treasury Department, the administration wants to put new requirements in place that would make it easier for the government to monitor how money is moving around, including digital currencies. The report said that cryptocurrencies pose a “significant detection problem” and are used by top earners who look to evade taxes. Businesses would be required to report cryptocurrency transactions above $10,000 under the new reporting requirements.
Compliance concerns with crypto
Unsurprisingly, regulatory uncertainty will be one of the biggest barriers. However, despite being in the crosshairs of regulatory watchdogs, the nascent sector is increasingly prevalent among businesses and consumers. But there are a few red flags they must be aware of.
Signature Litigation senior associate Kate Gee opined that financial institutions using cryptocurrencies for domestic and global payments must keep a sharp focus on compliance and risk. She said, “With new cryptocurrencies being launched regularly and as the exchanges evolve, the system is becoming increasingly complex.”
For most firms, the appeal of cryptocurrencies lies in its digital, anonymous and decentralised nature, but those features create exposure to risks. According to Gee, the biggest bane of using cryptocurrencies is the risk of scams as cybercriminals are creating new opportunities for fraud or to launder money through cryptocurrency systems. “Frauds involving cryptocurrencies are now valued in the billions: in the economic uncertainty caused by the pandemic,” she said.
Gee added, “The cryptocurrency exchanges represent a centralised target for hackers and fraudsters, but holders and users of cryptocurrencies and other digital assets also face other risks: hacking of the digital wallet, fake ICOs, Ponzi schemes resulting in the misappropriation of the tokens, dealing with fake or unregulated brokers, or making payments by way of a wholesale fraudulent cryptocurrency exchange platform.”
Indeed, with the escalation in digitalisation, cybercriminals only need computer power and internet access to break into digital wallets or exchanges, or to fraudulently entice a payment. Gee said, “Once a payment is made, the factors which make cryptocurrencies so appealing to many also mean that the payment is often irreversible and difficult to trace.”
“To protect against the risks involved, companies should conduct a robust risk assessment and authentication process before committing to a payment using cryptocurrency,” Gee advised.
Hackers are not the only risk when it comes to dealing in cryptocurrencies. Gee said internal risks can be more deadly, “for example employees or contractors misappropriating cryptocurrency and digital assets due to gaps in internal security systems or by unauthorised access to the key.”
Despite these concerns and regulatory issues, the crypto sector continues to go from strength to strength with more startups sprouting across the world as well as attracting investor attention.
The question now is will the downward shift in price alongside stricter regulation mark the beginning of the end for the bitcoin bull run, which has seen the price rise roughly fivefold since October 2020? Matveev concluded that “It’s unlikely that this announcement will significantly affect the crypto space, however, with businesses becoming more environmentally aware, it may lead them to make more conscious decisions about the crypto that they choose to use.”
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