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⚡ Elon Musk announced #Tesla (TSLA) would no longer transact in #Bitcoin due to concerns over fossil fuels powering mining and transactions. He even said he was working with #Dogecoin developers on improving transaction efficiency, which is huge dogecoin news and could affect Tesla stock. @ARK Invest‘s analysts had other ideas for Elon and they're worth talking about!
There's currently a lot of drama between Elon Musk, Bitcoin and Dogecoin on Twitter, but I think a lot of people are sleeping on a few huge opportunities here. I'm excited to give my take on what's going on, talk about some things Elon Musk didn't say when he paused Tesla's Bitcoin transactions and how I think he can make a huge impact on cryptocurrency well beyond buying Bitcoin and Doge. Don't sleep on this. If you enjoy this type of tech research and market commentary, let me know by liking this video and subscribing.
If you turn on all notifications, you'll always be the first to know when I release new research, regardless of how YouTube tunes its algorithm. Here's what's going on. Earlier this year, Tesla announced that it bought $1.5 billion worth of Bitcoin, which was about 7% of its corporate cash. By buying Bitcoin, Tesla diversified its cash position, which is good since the dollar loses value over time and they could start accepting payments in Bitcoin. That move made sense to me for a lot of reasons.
For example, Bitcoin is a universal currency so Tesla can transact in it in every country. That's a nice feature for a global company. But this move was also pretty controversial for a few reasons. The two big ones that I heard over and over are Bitcoin's volatility and Bitcoin's energy usage. I covered that first point in an episode focusing on Bitcoin as an institutional investment and what mass adoption by big companies man like Tesla would mean
for its price. Spoiler alert: it would go up a lot. When Tesla made this announcement, Bitcoin was at around $45,000. Fast forward a few months, and Elon is now tweeting about the other side of the coin, no pun intended, by talking about Bitcoin's energy usage. Those tweets brought Bitcoin back down to around that same $45,000 price. Coincidence?
Probably. Here's what Elon Musk had to say about it. Tesla has suspended vehicle purchases using Bitcoin. We're concerned about the 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.
Tesla will not be selling any Bitcoin, and we attend to use it for transactions as soon as mining transitions to more sustainable energy. We're also looking at other cryptocurrencies that use less than 1% of Bitcoin's energy per transaction. Okay, so let's break this down real quick. First, what didn't get said is as important as what God said. There's no mention of Bitcoin's volatility, which has been pretty crazy so far this year.
It seems that none of Tesla's big shareholders are telling them to reconsider holding such a volatile asset as part of their cash position, which I think is a great sign to other big companies that Bitcoin can really be held this way. That's huge. Second, Tesla isn't selling any Bitcoin and still plans to use it for transactions in the future. Like everything else, that could change tomorrow. But I'm surprised to see Bitcoin's price and the community respond so negatively to a statement that flat out said that Tesla will not be selling any Bitcoin, but that's just me.
And third, Elon's chief concern is about the rapidly increasing use of fossil fuels for Bitcoin mining and transactions.
He also tweeted a link to the Cambridge Bitcoin Electricity Consumption Index or the CBECI, which shows Bitcoin's electricity consumption doubling over the last few months. His solution is to pause Tesla's Bitcoin transactions and explore other cryptocurrencies that use less than 1% of Bitcoin's energy per transaction, even going as far as to work with the Dogecoin developers to improve transaction efficiency on their network. Trust me, I have a lot of respect for Elon Musk and his history with PayPal. By working with Dogecoin, I believe Elon could be barking up the wrong tree.
Here's why I think that. For two reasons. First up, let's talk about the energy Bitcoin uses. Here's a tweet from Yassine Elmandjra, ARK Invest's crypto asset analyst. Framing this on an energy per transaction basis is completely misguided. Energy is used to secure and mine Bitcoin, not support transactions.
The fact that Tesla is comfortable holding Bitcoin but not comfortable receiving payments tells Yassine that something is off. What does that actually mean? Let's dig into ARK Invest's white paper titled “Bitcoin Mining, the Evolution of a Multibillion Dollar Industry. Don't worry, I'll go through just the parts that explain mining versus transacting on the chain to show why transaction efficiency might not be the only opportunity worth considering. Here's how the paper begins.
Bitcoin's innovation lies in its ability to coordinate, trust, and facilitate the transfer of value without relying on a centralized authority. The enabler is proof of work mining, a mechanism that adds new Bitcoin to the money supply and protects the network against nefarious actors attempting to spend the same Bitcoin more than once. Through economic incentives, miners voluntarily secure the network by verifying blocks of transactions and appending them to Bitcoins public ledger. So it's this mining step that secures the network and verifies blocks of transactions, as opposed to that happening during the transaction itself.
Okay, so what the heck does mining mean? As entities compete to solve computationally intensive math problems based on cryptographic hash algorithms, they provide proof of execution of a costly computation.
A hash algorithm takes in random data, and depending on the input, it will output some combination of characters, but its output is of a fixed length. This process of hashing a block of transactions repeatedly until it matches a target output is known as mining. The only way cryptominers can solve this math problem, which means getting the output of characters exactly right is by performing the operation over and over until the solution is found by chance. The likelihood of a miner finding the solution goes up with the amount of resources they use to solve the problem.
Those resources are computing power and electricity. The other thing I want to point out is that comparing the total energy usage of Bitcoin to the transaction energy usage of something like Visa isn't apples to apples. Bitcoin completely replaces the entire banking system, not just something like credit transactions. A more fair comparison would be comparing Bitcoin's electricity usage to the energy usage of the entire global banking and monetary system. This white paper goes even further, comparing it to the entire gold mining industry as well.
My only point here is that when Elon says Bitcoin uses a ton of energy, a lot of which comes from fossil fuels, one question we should follow up with is compared to what. In a previous episode, I talked about the efficiency of Intel's X86 chips versus Apple's ARM chips. In that episode, I talked about how efficient computer chips can do more with the same amount of power, and that same principle also applies here. In this case, more efficient chips lead to a higher hash rate. Since this cryptographic hashing problem is a pretty specific type of problem, the chips that are best at solving it are application specific integrated circuits, or A6.
This is where I think Elon Musk and Tesla could do something amazing for the energy consumed by Bitcoin mining, just like they're doing for point to point travel and energy storage. Instead of focusing on Dogecoin's transaction efficiency, why not build a fully integrated solution designed for cryptocurrency mining? Sam Korus is ARK Invest's analyst focusing on robotics, electric vehicles, energy storage, alternate energy and space. Here's how Sam responded when Elon gave examples of the rising fossil fuels powering Bitcoin.
This should be a short phenomenon. The more aggressively renewable plus battery plus Bitcoin systems are rolled out, the faster these people are priced out of the market. Renewable, battery, aggressive: sound like a company we know? And before you crush me in the comments about Tesla not making Bitcoin systems, remember that that Tesla makes their own full selfdriving chip: an ASIC where the specific application is autonomous driving. They weren't in the chip making business until they were. Tesla's mission statement is to accelerate the world's transition to sustainable energy, and the annual power consumption of the Bitcoin network is about the same as Norway for the country, or if you prefer it's about 80% of the power consumption of New York State.
Yeah, Bitcoin mining takes a lot of energy. Okay, so for real, though, I'm not saying Tesla should just bust into the crypto mining market tomorrow. What I am saying, though, is that instead of focusing on Dogecoin and transaction efficiency, Elon could put resources towards energy and hardware efficiency, which I think we can all agree that he's the king of. And Tesla's auto bidder system is in a fairly unique position to dominate. Let me explain. ARK Invest and Square, ticker symbol SQ, recently released a small white paper together titled Bitcoin is the key to an abundant clean energy future.
Square's ARK Invest third biggest investment overall, with around $1.5 billion in it, only behind Tesla and Teladoc. So it's really cool to see them work on research together. I'll just highlight the parts from the memo that are relevant to Tesla. Here's the intro: in this memo, we aim to explain how the Bitcoin network functions as a unique energy buyer that could enable society to deploy substantially more solar and wind generation capacity. This deployment, along with energy storage, aims to facilitate the transition to a cleaner and more resilient energy grid.
We believe that the energy asset owners of today can become the essential Bitcoin miners of tomorrow. Bitcoin miners are unique energy buyers in that they offer highly flexible and easily interruptible load, provide payout in a globally liquid cryptocurrency and are completely location agnostic, requiring only an Internet connection and electricity. These combined qualities constitute an extraordinary asset an energy buyer of last resort that can be turned on and off at a moment's notice anywhere in the world. That should be really attractive to Elon and Tesla, whose mission is exactly to accelerate the world's transition to sustainable energy.
Because this buyer of last resort would allow Tesla's auto bidder to root electricity to nearby Bitcoin miners if the economics make more sense than to store that energy for other uses later. Here's more from Square's and ARK's white Paper. Bitcoin miners are an ideal complementary technology for renewables and storage. Combining generation with both storage and Bitcoin miners presents a better overall value proposition than building.
the generation and storage alone. There will always be physical limitations to how much energy can be effectively stored without dissipation. However, the daily intermittency challenge can be almost entirely met with just a few hours of storage capacity. That daily intermittency challenge they're talking about for solar means power generation peaks when the sun is out, but demand peaks at night when everyone is at home and it's dark out. Here's more from the paper. By combining cryptominers with renewables and storage projects, we believe it could improve the returns for project investors and developers, moving more solar and wind projects into profitable territory.
It could allow for the construction of solar and wind projects even before lengthy grid interconnection studies are completed. As Bitcoin miners can off take the energy until selling to the grid becomes possible, and the extra energy production in storage could provide the grid with readily available excess energy for increasingly common Black Swan events like the excessibly hot or cold days when demand spikes. For example, the early 2021 outages in Texas. Note that this excess energy will also be quite useful as society's electricity demands increased with the proliferation of electric vehicles and the electrification of all devices.
In a sense, the unlimited appetite of miners allows them to eat whatever remains of the duck's belly. Given these benefits, we believe it makes a logical sense for utility scale storage developers to augment their current battery offerings with Bitcoin miners.
The full paper is worth a read, and I've linked it in the description below. But let me save you some time by telling you how it ends. It identifies three meaningful business opportunities as next steps, all of which could be right up Elon's alley in general, if not Tesla's alley specifically. One, energy management software and services. Energy management companies that specialize in both storage and binding could build software to decide in real time the best use for a newly created electron whether to use it, store it or mine it.
They could also provide key asset management tools and analytics to monitor project performance. That's a great fit for Tesla's auto builer software. Two, energy minor marketplaces. Managed marketplaces could emerge to connect project developers, minors and financiers. One key challenge would be solving the current credit worthiness threshold for existing cryptominers. This is where I think Elon's experience with PayPal and thinking about financial systems as a whole really shines.
Using artificial intelligence to solve for this dynamic creditworthiness check for existing cryptominers could be a cool new spin off for Elon Musk. What if Tesla prioritizes power to minors in order of worthiness? But instead of financial credit worthiness, it was based on carbon credits. So Tesla prioritized power to the cleanest cryptominers. That would be a pretty sweet idea.
The third opportunity identified in this paper is async manufacturing. New chip boundaries could be built to meet the expected search in demand. Samsung and TSMC are leading the way with recent announcements of new North American plants. Square and ARK Invest also expect to see continued hardware and firmware improvements to increase the durability of mining equipment, optimized for interruptible power usage.
So, what if Tesla came out with a fully integrated crypto mining solution that included clean power production, very efficient energy storage via Tesla's advanced batteries, and the right hardware to use that energy in the best way for mining Bitcoin, just like Tesla's cars are the right hardware to use that energy in the best way for transportation. Tesla could even make over the air software and firmware updates to the system over time, just like they do with their cars. Comment below or tweet me @tickersymbolyou with whether or not you think all of these ideas are just crazy,
or, if Elon should get into the energy side of crypto mining? Is this another multi billion dollar opportunity for one of the world's richest men?
Or are we all barking up the wrong tree? Seriously, I'm excited to hear your thoughts on the future of Tesla and Bitcoin. Two of the biggest big ideas happening right now. Your voice matters. And if this video helped you understand more about Bitcoin, crypto mining, or energy, consider liking it and subscribing to the channel with all notifications turned on.
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