Bitcoin Rebounds After Elon Musk's Tesla Denies Selling off Bitcoin Holdings: 4 Things Investors Need to Know
As an asset class, cryptocurrencies (crypto) are known for being infamously volatile, save for exceptions like stablecoins. Even the largest cryptocurrency Bitcoin (BTC) is still not immune to this volatility.
From 2016 to 2017, BTC’s price went up by about 111%. From 2017 to 2018, its price went up by about 1,120%.
After reaching its all-time high price of about US$13,000 at the end of 2017, its price went up by about 392% to reach an all-time high of US$64,000 in April 2021, only to drop 29.2% to US$45,300 at the time of writing.
It is clear that volatility is much more pronounced in the crypto markets compared to the mainstream stock markets. And like mainstream stock markets, crypto prices are moved by news developments and speculation but in a more exaggerated manner.
Increasingly, these price movements occur when Technoking of Tesla: Elon Musk starts tweeting.
BTC’s price soared to an all-time high in March after Tesla announced that it had acquired US$1.5 billion BTC and Musk tweeting that Tesla would be accepting the token as payment for Tesla vehicles.
However, the company’s earnings reports that was released in April 2021, revealed that the company cashed out about 10 per cent of its Bitcoin holdings for about US$272 million in cash.
This netted the company about US$101 million in profits boosting its record quarter.
Just last week, Musk announced on Twitter that Tesla will no longer be accepting BTC as payment citing the token’s ‘great cost to the environment.’
Since then, the market value of bitcoin has fallen from US$1.1 trillion in April 2021 to about US$847 billion at the time of writing.
This however has sparked interest in more eco-friendly crypto alternatives like Cardano (ADA) which saw the coin temporarily become the fourth biggest coin by market capitalisation at the time of writing.
Naturally, this might be concerning for you if you are holding BTC or other cryptos.
Here are four things you need to know!
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any investment product. The writer may have a vested interest in the investments products mentioned. Information is accurate as of 14 May 2021.
1. Will Tesla Sell More of its Bitcoin?
The short answer? There’s really no telling what Tesla will do with its Bitcoin holdings.
Over the weekend, Musk responded to Twitter account @CryptoWhale, a self-styled ‘crypto analyst’ that writes about market and crypto trends on his/her’s Medium blog.
This tweet suggested that Tesla may be planning to sell off more of its Bitcoin holdings, coupled with Musk’s tweets over that weekend criticising Bitcoin’s lack of decentralisation and his belief in crypto sparked a Bitcoin selloff.
Bitcoin’s price crashed to US$42,000, the lowest since February 2021.
On Monday (17 May 2021) Musk tweeted again denying that Tesla has sold any Bitcoin:
This saw Bitcoin’s price bouncing back to US$45,300 at the time of writing.
What a wild ride indeed.
2. Bitcoin’s Environmental Impact vs Gold vs Banking Industry
This move has shown a spotlight on Bitcoin’s negative impact on the environment.
This boils down to the energy needed for the creation of new Bitcoins.
As Bitcoin operates on the Proof of Work (PoW) consensus mechanism and process, new bitcoins are minted through bitcoin mining.
Put simply, mining will help improve the Bitcoin network’s security by combating fraud and securing cryptocurrency transactions.
I may be simplifying it a bit but, mining is like a contest where computers compete to provide a solution for a complex mathematical problem (i.e. hash challenges). The computer that discovers the solution first will win the chance to write the next block into the ledger.
In exchange for giving up your computing power to Bitcoin’s network for mining, you will be rewarded with newly created Bitcoins.
In other words, the PoW process functions as a consensus mechanism that decides who gets to update the ledger amongst a group of unrelated strangers who have no reason to cooperate with each other.
Although the PoW process is great for managing a decentralised ledger, it is not without its faults.
The mining process takes a toll on the environment but not as much as you expect.
According to a report from Galaxy Digital, a diversified financial services firm dedicated to the digital asset, cryptocurrency and blockchain technology industry, Bitcoin consumes about 113.89 Terawatt-hour (TWh) annually.
To put this into context, this is more than double Singapore’s annual electricity consumption of 51.7 TWh in 2019 according to data from the Energy Market Authority.
Also, a survey done by Cambridge University’s Centre for Alternative Finance in October 2020 found that although 76 per cent of proof-of-work miners used renewable energy, only about 39 per cent of total energy consumption actually comes from renewables.
This may seem like quite a bit of energy. But, I would think that a more fair comparison would be to compare Bitcoin’s energy consumption to rival assets like Gold or the fiat currencies issued by central banks.
Galaxy Digital estimates that the global banking industry consumes about 263.72 TWh/yr of energy a year while the global gold industry consumes about 240.61 TWh/yr.
Granted, the environmental footprint of Bitcoin mining is still not ideal. But, at least it is less than the banking and gold industry.
In an interview with Business Insider, Fundstrat Global Advisors managing partner Tom Lee stated that:
“I don’t think it’s going to get people negative on bitcoin, but it is going to get people to focus on the problems that are being created by digital assets,” and
“It is probably better to view it as a call to action for the bitcoin industry to focus on renewables or more efficient ways to provide proof of work.”
This may weaken Bitcoin’s dominance at least in the short term especially with the Environmental, Social, and Corporate Governance (ESG) investing movement picking up steam.
3. BTC Dominance Falls Below 40%
Speaking of dominance…
At the time of writing, Bitcoin has a market capitalisation of US$847 billion which is about 40 per cent of the total global cryptocurrency market capitalisation.
The landscape of crypto is changing.
Bitcoin used to be the unrivalled king of the crypto jungle, making up more than 90% of the crypto market at the start of 2017. Even at the start of 2021, Bitcoin maintained its dominance as its market share was still around 70% when its price soared.
But, its dominance has been waning as more altcoins coins have been introduced and have gained in value.
The total market capitalisation of all altcoins is about US$1.36 trillion after hitting all-time highs of almost US$1.5 trillion last week.
In the past, the majority of the top 50 coins used to move together in one general direction on any given day.
But, it appears thing are changing,
4. Creator of Stock to Flow Model Says Intact Model Predicts Bitcoin to Reach $100k by End 2021
Despite the recent crypto market correction, there are supporters like Plan B who seem sure that Bitcoin’s bull run in just starting.
For the uninitiated, Plan B or @100trillionusd as he is known on Twitter claims to be a Dutch institutional investor with a legal and quantitative finance background that manages around US$100 billion in assets.
He was also the one who came up with the influential Bitcoin (BTC) Stock-to-Flow (S2F) model in his paper Modeling Bitcoin Value with Scarcity that was published back in 2019,
Plan B used scarcity to quantify and model Bitcoin’s value, arguing that Bitcoin is a scarce digital resource (the maximum and total amount of bitcoins that can ever exist is 21 million.)
Also, this S2F model can be used to value commodities and precious metals as well.
Like the name suggests, the S2F ratio measures the relationship between the stock of a certain resource in circulation (number of bitcoins in circulation) against the flow of the resource (how many bitcoins are being produced).
As such, this ratio cannot be detached from the demand and supply mechanism which means that the Bitcoin halving events have a great impact on this ratio.
FYI: According to Investopedia: a Bitcoin halving event is when the reward for mining Bitcoin transactions is cut in half. This event also cuts in half Bitcoin’s inflation rate and the rate at which new Bitcoins enter circulation. Both previous halvings have correlated with intense boom and bust cycles that have ended with higher prices than prior to the event.
At the time of writing, the Bitcoin network’s annual inflation rate is about 1.77%. As time progresses, this inflation rate will continue to fall.
This correlation between the S2F model and bitcoin’s price can be seen in the chart below.
So far, the modal has been largely accurate in predicting Bitcoin’s price movements.
Theoretically, this price could rise to more than US$100,000 at the end of 2021 based on the stock-to-flow model shown above.
In addition, Plan B has even upgraded his S2F model for Bitcoin, dubbing it the “BTC S2F cross-asset (S2FX) model.”
He also tweeted that the ‘S2FX (model) intact … this is starting to look like 2013 bull market’ in reference to Bitcoin’s first bull run in 2013.
Athough Plan B is extremely bullish and he has been right so far, let’s remember that past performance is not indicative of future returns.
Also, critics of this model say that one of the model’s limitations is its assumptions which may be unable to take into account the other aspects of Bitcoin’s valuation other than supply scarcity.
One such argument states that since Bitcoin has only been around for 11 plus years, there is not enough data to make this model more reliable and accurate.
In addition, external factors like unforeseen economic Black Swan events could negatively affect this model. But this is also true for other models that rely on historical data to make price predictions.
Not to mention that some banks and research firms have set price targets for Bitcoin based on these fundamental analysis and scarcity models.
For example, global investment bank and financial services holding company JPMorgan Chase are bullish as per their undated price target for Bitcoin.
Back in April 2021, JPMorgan analysts wrote that:
Mechanically, the bitcoin price would have to rise [to] US$130,000, to match the total private sector investment in gold.
Other supporters like Thomas Lee a top-ranked Wall Street analyst with some 30 years of research experience, and the former Chief Equity Strategist at global investment bank JPMorgan from Fundstrat Global Advisors told Business Insider on 16 May 2021 that he is still bullish on Bitcoin.
He even upgraded his Bitcoin price prediction from US$100,000 to US$125,000 by the end of 2021.
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