[ANALYSIS] Elon Musk, Bitcoin, and China: Is This the End?

Elon Musk
Elon Musk’s appearance on Saturday Night Live. Source: MarketWatch

Elon Musk and the Risks of “Influencer Marketing”

A past article published on The New Global Order underlined how political events are not immune to financial speculation. In this sense, Elon Musk has been playing with fire. For example, he’s a renowned supporter of Dogecoin, a “satirical” cryptocurrency. In the past few months, his tweets in support of the coin have inflated its price up to +800% in one day.

And yet, Musk himself most recently sent the price of Dogecoin down a slippery slope. The reason? During an appearance on Saturday Night Live, he called Dogecoin “a hustle”. Before the episode ended, the coin had lost 29,5% of its value. It is safe to say that Elon Musk knew one thing or two about the volatility of cryptocurrencies.

A Tough Week for Bitcoin (and Elon Musk)

On May 13th, with one of his laconic tweets, Elon Musk announced that Tesla would no longer accept payments in Bitcoin. According to the flamboyant entrepreneur, the decision was based on environmental concerns tied to Bitcoin mining. The price of the asset went down from an all-time high of $60k on May 10th to about $42k on May 16th.

Elon Musk
Elon Musk’s post announcing that Tesla will no longer accept payments in Bitcoin. Source: Twitter

But the misfortunes of the flag-bearer of cryptocurrencies did not end. On May 18th, China banned financial institutions and payment companies from providing crypto-related services. The ban covers account openings, registration, trading, clearing, settlement, and insurance. Furthermore, Chinese banking institutions cannot issue crypto-related financial products.

On May 17th, Bitcoin touched a low value of $30,202 per coin, the lowest since January 2021. In the span of one week, the entire market of cryptocurrencies lost $1 trillion in value. An amount of wealth the equivalent of 1.5 “Next Generation EU”‘s was dissipated.

Amidst the ensuing chaos, Elon Musk tweeted a “diamond hands” emoji. Apparently, that was his way of signaling that Bitcoin was worth holding onto. But the panic was already spreading, and on May 19th the Google searches for “Should I sell my crypto” were up 400% from the day before. From May 9th to May 28th, Bitcoin had lost 47.3% of its value. Institutional and amateur investors alike recurred to sell-off, leading to further losses.

It is legitimate to ask whether amateur investors should have done their homework. Yes, they definitely should have. Any professional trader would tell prospective investors to do their research on the assets they are interested in. At the same time, arguably, with big capital come big audiences, and consequently big responsibilities.

Bitcoin: Sudden Crash or Disaster in the Making?

The peculiarity of this series of events is precisely that it did not remain confined to a small number of insiders. In fact, Bitcoin is increasingly the object of small investor’s attention. Its astonishing growth rates in the past year, and the prospect of easy and fast gains, are undeniably appealing. All in all, the public’s trust in Bitcoin was on the rise in 2020. So much so that Financial Times’ Frances Coppola wrote that Bitcoin could be an interesting choice as the world’s reserve currency. Therefore, the sudden drop in its value was a bolt from the blue to many.

Source: Forbes

To understand what brought about the “May 2021 Crypto Crash”, it is necessary to take a step back. Only by looking at things from a distance, in fact, it is possible to reconstruct the bigger picture. Under this light, Musk’s U-turn, the Chinese ban on crypto, environmental concerns and financial turmoil look like pieces of the same puzzle.

Why Did Elon Musk Get Cold Feet?

Different people describe Elon Musk in different ways. To someone, he’s a role model and the epitome of a successful businessman. To someone else, he’s a troll. Some people think of him as a genius, others as a fool. At any rate, as someone that can exert a detectable effect on financial markets with a tweet, he is certainly influential.

Certainly, it would be hard to believe that anyone could build an empire such as Musk’s without having some common sense. If this is the case, it is legitimate to wonder why Elon Musk would withdraw his support for Bitcoin. He could have certainly known that this would cause a sharp drop in its price. It would not have been the first time that the financial market would go insane at his whim.

In other words, it is possible that the visionary CEO either envisioned a larger gain to be made in the future, or he evaluated that the momentary loss of a portion of his fortune was somehow the lesser evil. It is not possible for outsiders to know for sure what drove his decision, but it is possible to trace back the most salient aspects of these events and connect the dots.

Elon Musk: The Reasons Behind the Estrangement

One issue that deserves better investigation is what prompted Musk’s sudden U-turn with regards to Bitcoin. In his statement, Musk cites environmental concerns, tied to the use of fossil fuels for Bitcoin mining. As a matter of fact, these concerns are not baseless. In a year, Bitcoin uses up as much energy as Poland however, not all of this energy comes from fossil fuels. Plus, it is very hard to ascertain the mix of renewable and non-renewable sources in mining factories.

Elon Musk
Source: Criptovalute

The issue is so controversial that a recent Nature Communications academic paper on the carbon footprint of Bitcoin mining in China received heavy criticism. Allegedly, the paper failed to clarify how the researchers estimated the energy mix for mining machines. In the absence of accurate estimates, the issue of how much Bitcoin should consume is at the mercy of value judgments. For those who think that cryptocurrencies are little more than a scam, no amount of pollution is tolerable. For those who see it as the future of finance, it is worth sacrificing the environment, to an extent.

The point is that, by all means, Musk should belong to the latter category. Thus, his disavowal of Bitcoin seems rather “out of character”. Even more so given that in February Tesla bought $1.5 billion in Bitcoin and started accepting it as payment. Considering the context, it is easy to argue that behind the crash there may be more than meets the eye.

What is Going on with Tesla?

It has been suggested that the resounding announcement of Musk’s estrangement from Bitcoin was nothing more than a smokescreen for Tesla’s losses. Indeed, in the past few months, the company has been sailing in troubled waters. 

In March, the US National Transportation Safety Board warned that Tesla was using customers to test new driverless technology, or “Full Self Driving”. In April, at the Shanghai Auto Show, protesters complained about alleged brace malfunctioning. Further concerns tied to Tesla’s storage of customers’ data and the overall safety of its cars put Elon Musk in a difficult spot.

This series of bumps in the road, together with the more specific issues discussed below, point towards the idea that Elon Musk willfully created havoc around Bitcoin. In other words, disowning the currency citing environmental concerns could have been part of a strategy of distraction. The aim of this strategy would have been to divert attention from Tesla’s flaws with just a pinch of greenwashing. This is not to say that Musk is not concerned with the environment at all. Rather, it means that other elements likely entered his considerations.

Tesla’s Problems with the Chinese Market

Amidst these difficulties, two emerging challenges appear as particularly worrisome. The first of them is relatively new, but its impact could be substantial. In particular, the number of registered Tesla vehicles in China dropped to 11.949 units in April, down from 34.714 units in March (see figure below).

Elon Musk
A graphic signaling the sharp drop in Tesla sales in April 2021. Source: Money.it

As the Chinese market represents one-fifth of Tesla’s revenue, this is a serious blow for the company. All the more so, as China and Musk’s company started out as the best of buddies. Only two years ago, in 2019, Chinese banks lent Tesla $1.4 billion over a 5-year period.

Despite this idyllic life, Elon Musk’s and China’s interests are very different. For starters, Tesla and the Chinese government have completely different outlooks on cryptocurrencies. So the partnership took place as the former became a champion of crypto, while the latter was cracking down on it.

But the sources of divergence run deeper than that. Tesla established its Shanghai Gigafactory to cut down transportation and manufacturing costs. Also, betting on electric vehicles was functional to China’s goal of becoming carbon neutral by 2060. To be sure, that goal remains unchanged. The only difference is that now the country does not feel it has to rely on foreign electric cars.

Is China Betting on Domestic Companies?

In fact, the domestic competition in the Chinese market from companies such as NIO is on the rise. The government’s support is self-evident in how the public discourse changed. Xinhua and People’s Daily have joined Tesla’s critics. The popular newspapers often publish opinion pieces stating that Tesla ignores the rights of consumers. Reportedly, even the protests at the Shanghai Auto Show were part of a set-up to discredit the company.

However, even if this process of “decoupling” between Tesla and China were to continue, it would be incremental. In fact, in the first trimester of 2021 Tesla did score a discouraging -18%; but in light of the +745% of 2020, this number looks like a bearable loss. That being said, this is not the only issue that Tesla is confronting.

Tesla’s Logistical Issues

A graphic showing the increasing “lead time” in the supply of chips. Source: Money.it

In fact, the company has encountered serious issues with the supply of semiconductors lately. The “lead time” (the period of time between the order and the delivery) rose to 17 weeks in April. Between 10k and 20k vehicles are sitting idly in Tesla’s Freemont plant. These chips, in fact, are a fundamental component in their construction.

This logistical problem also reverberates on the price of Elon Musk’s cars, and thus on their competitiveness. In May, Tesla increased its Model 3 and Model Y prices. This was the fifth increase in just a few months. According to Intel Corp’s CEO, this shortage could last for years

In this regard, Intel’s $20 billion plan to address the issue might alter the geopolitics of chips. The plan, in fact, entails building two factories in Arizona and expanding to other locations in the U.S. and Europe. This suggests that Tesla’s difficulties on the Chinese market, the logistical bottleneck, and the Bitcoin crash are all elements of a larger phenomenon: the US-China “trade war”.

Musk’s Investments in China: a Calculated Risk

As a matter of fact, it is possible that Musk simply bit off more than he can chew when deciding to invest in China, but two elements emerge as particularly relevant in contradicting this thesis.

The Attractiveness of the Chinese Market: High Risk, High Reward

The first element is economic in nature. Namely, when an American investor decides to bet on China, he very likely knows the situation on the ground. Ostensibly, he is informed about the treatment of foreign investors, concessions, and limitations. 

Taking this into consideration, it is likely that the enigmatic entrepreneur was conscious that the Chinese market was risky. After all, China’s ban on Bitcoin is not the first forceful act of the government on its companies. At the same time, the reward was high: China’s vast internal market is the object of desire of any automotive company. Therefore, the decision to invest there does not appear at all as irrational.

Elon Musk: “The Last Man Standing” in the US-China Trade War?

Is Elon Musk pulling out a stunt, willfully triggering the Bitcoin crash? Source: Business Standard

The second element is more political in nature. The fact that Tesla is trapped in a logistical bottleneck is due to the arm-wrestling between the Chinese and US governments. Measures are in place in the US from September 2020, slowing down the import of chips from China. Although these measures are not directed against Tesla, they do affect the company as collateral damage, as seen above.

Currently, the situation is increasingly heating up. In retaliation to the US measures, China regulated more strictly the export of sensitive technologies. In return, the US Senate is discussing the $250 billion U.S. Innovation and Competition Act. The package includes $52 billion in support of the domestic production of semiconductors.

Does this sour competition entail the end of Musk’s empire? Not necessarily. The honeymoon between Tesla and China might well have come to an end, but on the other hand, looking at the series of events that recently took place, it would appear that the resourceful entrepreneur is exploiting a window of opportunity.

In fact, the turn of the screw on the Chinese market, combined with the increased efforts by the US government to nationalize the production of semiconductors, might be a chance for Elon Musk to change his strategy. Namely, for partially abandoning the unequal Chinese market and betting on the American (and Indian) market instead.

At home, Tesla might find the support that China is no more willing to grant. Under this perspective, the decision to repudiate Bitcoin makes even more sense. If Musk had a sense that China’s crackdown was about to come, why not make a preemptive strike, and look like he was in charge of events?

The Bitcoin Crash: What’s Next?

Is Bitcoin flying “to the moon”? It is still possible, but not likely. Source: Cointelegraph

At the end of this analysis, it is only natural to wonder about the future of Bitcoin. According to a popular interpretation, the recent crash might help to “clean up the market”. In particular, two categories of investors appear detrimental to the health of the cryptocurrency market.

The first one is composed of amateur investors. These are usually small or micro-investors that, individually, would not have the power to throw the market off balance. But, as cryptocurrencies become more popular, more “recreational” investors enter the market. The problem is that, on an aggregated level, these people are buying into Bitcoin just for the thrill of seeing its value go up. In case of a stunt in growth, this kind of investor will most likely sell their shares. This, in turn, contributes to the sell-off en masse.

The second category is composed of traders taking excessive risk. These investors could be either retail or institutional. What they have in common is their use of “margin”. Essentially, this entails borrowing from their brokerage firm to take a bigger position in Bitcoin. The issue is that if prices go down traders have to sell their assets to cover their debt. This practice wiped out about 800,000 crypto accounts during the May Crash.

Now, the fact that occasional investors exited the market may lead to increased stability. Experts forecast that Bitcoin might even grow even more and reach a 6-figure value by the end of the year. However, before giving in to the temptation of “buying low”, two considerations should be taken into account.

Currency is Still a Government’s Prerogative

Cryptocurrencies appear to be, to some observers, the future of banking. Notably, Bitcoin attracted the interest of the then-Managing Director of the International Monetary Fund Christine Lagarde. Based on blockchain technology, in fact, cryptocurrencies ostensibly allow decentralized control over the currency. But the Chinese crackdown on Bitcoin should suffice as a reminder that centralized banking and financial institutions are not yet ready to retire. On the contrary, with the ban, the Chinese government reasserted its control over the financial market. This is coherent with China’s vision for two reasons.

First, the idea that underpins cryptocurrencies is that money should belong to everyone. This concept, of course, betrays a strong libertarian tendency. But China’s government closely controls and directs the economy, while also participating in important sectors. Hence, the need to assert “who’s in charge” to issue currency.

Secondly, China’s financial policy is designed to serve the real economy and favor stability. In contrast, cryptocurrencies are characterized by volatility. If this was not enough, the price of Bitcoin doubled in the past five months, quadrupled in the past year. This suggested that a bubble was forming. And, as it is well-known, it is hard to predict when bubbles will burst. Arguably, this “suspicious” trend prompted China to reduce its reliance on an asset that would lose its value anyway.

A Matter of Compromised Confidence

A second relevant element is that, in the absence of fundamentals, cryptocurrencies are tied to trust. Once that trust is compromised, it is very hard to gain back. As stated above, many small investors opted out of crypto during the crisis. Institutional investors are going down the same road, according to JP Morgan strategists.

So far, the value of Bitcoin had been increasing because it was more and more widespread. For example, since April 2021 PayPal accepts certain cryptocurrencies as payment. Other retailers, including Xbox and Burger King, were also joining the team of crypto-friendly shops, but as people sell out their crypto, it is hard to fathom whether paying with Bitcoin will still be a viable option in the future. Even if Bitcoin were to scale down, cryptocurrencies are probably here to stay. There is already much talking about different currencies, less reliant on fossil fuels for mining.

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[ANALYSIS] Elon Musk, Bit…

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