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Bitcoin crumbles after Elon Musk bails. Why it may never recover

Bitcoin crumbles after Elon Musk bails. Why it may never recover

13 May 2021

Bitcoin has fatal flaws and is now a novelty, not the currency of the future

Elon Musk bitcoin graphic

In many things, being first to market gives you an insurmountable lead but technology is not one of those things.

Blackberry invented the smartphone, Yahoo had the first search engine, Xerox invented the graphic interface.

In technology, the winner isn’t who comes first, it’s who has the best technology.
Few would still argue that bitcoin is the best-designed crypto currency. It’s slow, its governance is a mess and it has a critical flaw — energy use.

Berkshire Hathaway deputy Charlie Munger nearly top-ticked it with his scathing comments on May 2:

I don’t welcome a currency that’s so useful to kidnappers and extortionists and so forth, nor do I like just shuffling out of your extra billions of billions of dollars to somebody who just invented a new financial product out of thin air. 

I think I should say modestly that the whole damn development is disgusting and contrary to the interests of civilization.

With the Colonial Pipeline shutdown ongoing, he has a point. Bloomberg reports that $350m was sent to cryptocurrency wallets associated with ransomware attacks last year.

Of course, Munger been hating on bitcoin for years so I shouldn’t give him too much credit. What’s new today is that Elon Musk has made a U-turn on bitcoin in a statement:

“Tesla has suspended vehicle purchases using bitcoin. 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.

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 left the door open to using it again if it transitions to better energy use but that’s not realistic. If a Chinese miner uses only renewable energy, that energy could still be attached to the grid to displace coal. It’s a no-win situation for bitcoin.

The market reaction has been punishing:

Bitcoin daily chart

A clear break below $47,000 clears the way for a much deeper drop.

I have said that I believed bitcoin would get to $100,000 this year on a US ETF but the tide has quickly turned and I’m wondering if the SEC might draw the same conclusion. Ultimately, bitcoin is a psychological trade, not a fundamental one. When I first predicted bitcoin would hit $10,000 many years ago, it was because there were so many ‘true believers’. I was astounded by their commitment to it and I also recognized its value to money launderers and criminals.

Now, the tide has turned. The true believers are losing faith. The flaws in bitcoin are inarguable and like many early technologies, something better will come along. It’s clear that’s already happened but with so many cryptos, one will have to emerge that solves all the problems bitcoin set out to. I don’t know which one that is, but it’s coming.

When I read through the replies to Musk’s tweet, it’s clear we’re in a bit of a ‘denial’ phase of grief, but ultimately there will be mourning and people will move on (suddenly poorer no doubt). Price action has a way of accelerating that process.

Bitcoin isn’t going to zero. It will always have a cachet but it’s not the currency of the future and it’s time everyone stopped pretending that. It’s also going to prove to be a dismal store of value. That will give some life back to gold, which has been doing its thing for 4000 years.

For now though, the trade is simply to get out of the way.

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