Why is Bitcoin and the cryptocurrency market dropping?

As we have highlighted in previous articles detractors claim the Bitcoin mining industry is energy-intensive and damaging. Bitcoin mining is currently using 120 TW (Terawatt hours per year) which is the equivalent of Denmarks’ spending. Contrary to consensus thinking, Cathie Wood’s ARK Investment Management LCC has done a research collaboration and believes the impact of bitcoin mining is a net positive for the environment.

Summary

  • Elon Musk, the “Dogefather” announced yesterday on his Twitter that Tesla will no longer accept Bitcoin because of the increasing use of fossil fuels required for Bitcoin mining.
  • Bitcoin rebounded to about $50,000 after plunging as much as 17% and Ethereum dropped 14% to touch a low of $3,550, before bouncing back to about $3,965.
  • It is interesting how this comes after Elon Musk asked his followers if they want Tesla to accept Dogecoin and the answer was YES.
  • The twit stated that Tesla will not be selling any Bitcoin and will intend to use it for transactions as soon as mining transactions to more sustainable energy.

 

What happened to the cryptocurrency market is nothing else that a twit from the ‘Dogefather’, Elon Musk.

Prior to this, he twitted a chart showing the energy usage trend over past few months calling it ‘insane’.

Bitcoin rebounded to about $50,000 after plunging as much as 17% after Elon Musk said that Tesla had stopped accepting Bitcoin as a payment method. The price of the world’s number one cryptocurrency dropped from around $54,000 to $45,700 its lowest since March in just two hours.

Ethereum, the world’s second-largest cryptocurrency, followed a similar pattern, also dropping 14% to touch a low of $3,550, before bouncing back to about $3,965. “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,” Musk wrote.

CNBC reported that at the very first hour of the announcement $365 billion were wiped off the cryptocurrency market.

Bitcoin mining

Bitcoin mining is the process by which new bitcoins enter into circulation, but is also important for maintenance, completion of transactions and the general development of the blockchain ledger. As a decentralized cryptocurrency bitcoin is relying on miners around the world and requires computers that can solve complex computational math problems.

The software that mines bitcoin is designed so that it always will take 10 minutes for everyone on the network to solve the puzzle. It does that by scaling the difficulty of the puzzle, depending on how many people are trying to solve it. It always takes 10 minutes, and the winner is rewarded with some digital bitcoin. Then a new puzzle is generated, and the whole process repeats for another 10 minutes. Electricity must be made from other sources. The process creates large amounts of greenhouse gases, such as carbon dioxide, methane, and ozone. These allow sunlight to enter the Earth’s atmosphere, but then trap the heat. So, the more electricity produced, the hotter the planet gets.

However, in a recent research done by ARK Investment it was found that bitcoin mining has positive impact on the environment.

Bottom Line

On the one hand, someone will think Tesla is producing electric vehicles therefore, accepting bitcoin payments is contrary to its product. On the other hand, two days ago Elon Musk asked his followers on twitter to vote whether they want Tesla to accept Dogecoin payments. The answer was of course yes. Is this why Tesla is dumping bitcoin payments? The DogeFather is trying to promote Dogecoin even more.

However, this cryptocurrency market drop that impacted all the cryptocurrencies that follow the Bitcoin price movements, could be viewed as an opportunity for a lower entry investment. At the time of writing, all cryptos are showing a recovery.

What is interesting is that, Tesla will retain its $1.5 billion position into Bitcoin. According to Seeking Alpha, “Bitcoiners are pointing out the fallacy in Musk’s tweeting, noting mining has nothing to do with bitcoin transactions (which Musk’s Tesla will no longer accept), and everything to do with securing the network (Musk announced his intention to hold onto Tesla’s $1.5B stash).”

Disclaimer – I/we have no position in any stock mentioned. I wrote this article myself, and it expresses my personal opinions. I am not receiving any compensation for it, other than FDGT Academy. I do not have or had in the past any business relationship with any company that is mentioned in the above article.

Natalia C. - Junior Analyst at FDGT Academy

Natalia C. - Junior Analyst at FDGT Academy

I am a stock analyst/investor with prior experience and knowledge to BSc Accounting and Finance. After completing my degree and exposure to the accounting firms I decided that the direction I should choose is towards the Investment world. I completed my masters in Investment Management where it gave me solid fundamentals to build my career on. I have examined a lot of different aspects of investment, from REITS, derivatives, currencies, bonds, equity and hedge funds. I never stopped learning about the market which is why I can analyze and write articles for FDGT community always personally opinionated. My passion are green energy and electric vehicles stocks as a whole. I also had my share of analyzing the work form home stocks that are coming to take over in the upcoming years.

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