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Investing
May 21, 2021

Will Bitcoin’s energy consumption be the end of the crypto giant?

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Will Bitcoin’s energy consumption be the end of the crypto giant?

It has widely been reported in recent days about the news surrounding Bitcoin, Tesla and of course Elon Musk. On Wednesday the 12th of May, Musk announced that Tesla would no longer be accepting crypto leader Bitcoin as a method of purchasing Tesla’s electric cars. This news came as a huge surprise to crypto investors as it was only a matter of weeks since Musk announced that Tesla would be accepting Bitcoin as a payment method.

The latter caused the price of Bitcoin to rise considerably. The former, however, saw the price of a single Bitcoin fall dramatically. Prior to the announcement Bitcoin was trading at $56,755.90 but since the news went viral the price slumped to $49,498.70 and is now trading at a mere $39,647.00, respective to the first price.

So why did Musk make the U-turn?

It is no secret that mining Bitcoin is very energy intensive, and requires a huge amount of ‘dirty energy’ such as the burning of fossil fuels such as coal to mine a single coin. The Tesla boss questioned the future of the digital asset, distinguishing the carbon emissions emitted from Bitcoin mining as the reason. Musk tweeted on the 13th of May that “energy usage trend over past few months is insane”.

He further shared a chart from the Cambridge Bitcoin Electricity Consumption Index (inserted below). The chart shows the electricity consumption through Bitcoin mining and it is clear to see that since 2016 the energy consumed has been steadily increasing, before peaking on the 10th of May. This peak according to an analyst at the International Energy Agency, reached 149 terawatt-hours (TWh). To put this in perspective, 200 TWh is the total energy used by all data centers in the world, excluding those used in the mining of Bitcoin.

Source:cbeci.org

An analyst from Deutsche Bank stated that “If Bitcoin was a country, it would use around the same amount of electricity a year to mine as Switzerland does in total”. However, a recent study has shown that Bitcoin still uses a lot less energy than the traditional banking system, which currently emits 263.72 TWh. According to the same study carried out by Galaxy Digital, gold mining also uses up to twice the amount of energy that Bitcoin uses. Presently gold mining uses 240.61 TWh.

Volatility Continues

Since the announcement by Musk, Bitcoin’s value dropped by 15% to a two and half month low. This was around the same time that the crypto leader reached a $1 trillion market cap. To date Tesla have made a $1.5 billion investment in Bitcoin but chose to sell a huge reserve of Bitcoin in April to pad out their first quarter earnings report, raising $272 million in doing so.

This is just one of many factors that lead to the huge volatility within the crypto market.  And the fact that a single tweet can impact Bitcoin’s price so much again serves to highlight that crypto currency is a highly risky investment.

No one knows the future for cryptocurrencies –whether they’ll become a permanent feature of our lives, whether governments will try to regulate or tax them, or whether their price will keep rising. You can read more about why we always retain a balanced approach to investing rather than chasing trends and fads by clicking here.

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