Tesla buys Bitcoin respectability

Tesla’s decision to purchase $1.5 billion worth of Bitcoin might just have given the cryptocurrency some much needed credibility.

Tesla’s decision to purchase $1.5 billion worth of Bitcoin has not only led to a surge in the value of the controversial cryptocurrency – it may just have given it some much needed credibility.

Tesla boss Elon Musk revealed the firm had invested in the cryptocurrency to form part of the company’s cash reserves. He also claims that Tesla car buyers will soon be able to pay for their new vehicles with Bitcoin.

Following the announcement, the exchange price of the currency climbed from around $39,000 per virtual coin to $46,000. This follows a steady and dramatic rise for the cryptocurrency that began last October when the price was around $10,000.

So what does this surge in price and interest mean? Is Musk’s vote of confidence a sign that Bitcoin is maturing and starting to be taken seriously?

“I think that other tech companies will follow,” said Anton Dek, a research associate at the Cambridge Centre for Alternative Finance, who notes that Tesla isn’t the first major corporation to put serious money into Bitcoin. Last October, for example, the payment firm Square bought 4,709 coins for $50 million, the value of which has since quadrupled.

And its stock price surged following the Tesla announcement.

Dek notes that last time Bitcoin experienced a dramatic spike, it was largely driven by individual “retail” investors and a bubble of initial coin offerings (ICOs), which were viewed as new means of crowdfunding investments. This time around, the surge hasn’t been accompanied by the same level of public interest. Google Trends bears this out, showing that search volumes for Bitcoin are significantly lower than the bubble four years ago.

“Back in late 2017, there weren’t any institutions [making] these purchases, while now we have public companies,” said Dek, “So this time is different, because we have institutions.”

The reality is perhaps more complicated. And the surge in interest may be, to a certain extent, illusory. “Bitcoin exhibits these four-year cycles that, to an outside observer, appear random, but they’re not random at all,” said Andreas Antonopoulos, a Bitcoin expert and author of Mastering Bitcoin.

“They’re actually engineered in the algorithm. Bitcoin goes through a cyclical four-year supply shock on purpose.”

Antonopoulos describes how roughly every four years, the value of new coins that are mined is cut in half as a built-in measure to mitigate inflationary pressures. The current spike is arguably a function of the laws of supply and demand. “Assuming that the demand doesn’t disappear, there’s only one thing the price can do, which is double,” he said.

“The first bubble of Bitcoin happened in 2013, eight months after the halving. The second bubble happens in 2017, one year after the halving. This time, the halving was in July of 2020. And here we are eight months later and we’re in the third bubble,” he said.

“This is not a coincidence, what happens is when [a halving] happens, at first, everyone tries to adapt, and it creates this spring that gets compressed as demand pushes and pushes and pushes against an inelastic supply.”