The Breakdown - Et tu, Elon? What’s Really Behind Tesla’s Bitcoin Betrayal

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io and BitStamp and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, May 13th, and oh my God, let's bring you into my life yesterday. It's about 5 p.m. and I'm so excited because it's so very clear what the show was going to be about. Vitalik had pulled one of the craziest moves I'd ever seen in crypto, at once obvious and insane all at the same time. Here's the short version of the story. There are a slew of dog coins, all variants on Shiba Inu's meant to be better doges. Think doge with smart contracts.

Starting point is 00:00:52 But really, they're obviously about pumping and monetizing a cultural moment. So they had this weird approach to token economic design where they quote unquote burned half their supply by sending it to Vitalik Buterin's public wallet. Basically, the thesis was that he already has a ton of money, his ETH holdings recently surpassed a billion dollars, so he would most likely just not collect those tokens. The thing is, they didn't ask him, and they certainly didn't get his blessing. And once they were there in his wallet, they were fully in his control. Well, yesterday those tokens started moving. Vitalik sold and transferred on paper billions of dollars worth of tokens to charity. Of course, they're pretty illiquid, so it's actually not as much as it seems. But still, it was a crazy

Starting point is 00:01:32 move. I think I'll discuss it either tomorrow or on the weekly recap, but suffice it to say this was easily enough for a whole show. But no, as it turns out, Vitalik's dog money would not be the only rug pulled yesterday. Wednesday, May 12th, a day that shall forever be known now as Rug Wednesday. E2, Elon? So let's dig into it. First, let's discuss what actually happened. Here's the tweet from Elon Musk about Tesla and Bitcoin. Quote, Tesla has suspended vehicle purchases using Bitcoin. 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. Cryptocurrency is a good idea on many levels, and we believe it has a promising future. But this cannot come at great

Starting point is 00:02:13 cost to the environment. Tesla will not be selling any Bitcoin, and we intend to use it for transactions as soon as mining transitions to more sustainable energy. We are also looking at other cryptocurrencies that use less than 1% of Bitcoin's energy per transaction. So obviously, a bunch of thoughts here. First of all, for people who are saying some version of a tweet from a single person shouldn't be able to move markets like this. There's so much wrong with that assessment. I don't even know where to begin. First of all, is a market structure.

Starting point is 00:02:40 This is an extremely levered asset where cascading liquidations make every move down much more dramatic than whatever set it off. We also have a large number of whales and professional trading outfits who make an absolute ton of money counter-trading moves like this and leaning into the narrative. So one part of my response to this sentiment is that market structure make sentiment-based moves appear much more dramatic than the sentiment actually would hold for. Part two is that this isn't some random guy. It's not even some random billionaire. This is the

Starting point is 00:03:08 representative of a company whose massive purchase of Bitcoin drove that leg of the bull market from the mid-30,000s to the low 60,000s. This is that person basically backtracking in a way that completely aligns with the potentially most damaging fud of this entire cycle. So no, it's not Bitcoin market immaturity. It's a correct recognition that at least, in the short term, this is a significant event. So given that context, let's talk about it. One of the first things I said when Elon started playing the Bitcoin game is that it seemed likely to me that Tesla getting involved, perhaps counterintuitively, would increase the environmental fud around Bitcoin and increase the risk of that fud rather than going the opposite direction.

Starting point is 00:03:48 Wouldn't you think that a clean car company buying Bitcoin would increase the perception of Bitcoin as a clean asset? Well, Elon is not a paragon of climate virtue despite his day job. He has a huge number of critics and detractors. And my thesis was that more people were likely to take away that the move into Bitcoin demonstrated that Elon was full of crap about Tesla's environmental concerns, then were likely to change their opinion about Bitcoin as it relates to the environment. That, I think, is playing out. In short, Elon and Tesla getting involved in Bitcoin increased the environmental fud risk

Starting point is 00:04:18 for Bitcoin by putting a much more dramatic focus on it. But let's talk about why this happened now. I did a poll yesterday asking what people thought was really behind. behind this move. Of the over 1,500 votes, only 4.3% thought it had to do with genuine environmental concern. 21.6% said it was 4D chess of some kind. 41.5% the largest group said that it was shareholder or government pressure, and 32.5% said the man just loves chaos. So let's talk about interpretations that I think are wrong. Many people have said it's just him selling this to be able to buy it cheaper later, and I think it's pretty obvious that's not the 4D chess happening here.

Starting point is 00:04:56 I just don't believe that the richest man in the world, that specifically this rich man, cares enough about the price to do this. It just doesn't make any sense to me. Looking for the best way to unlock your crypto's liquidity, nexo.io is exactly what you need. Borrow against your digital assets at just 5.9% APR, earn passive income with yields of up to 12%, and swap between more than 75 market pairs with the instant nexo exchange. Try the NXO wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. Secure, regulated, and reliable, BitStamp is the cryptocurrency exchange of choice for more than 4 million investors and traders worldwide.

Starting point is 00:05:43 Since 2011, BitStamp has been a trailblazer in security, head of the class in personal customer service, and dedicated to making buying crypto fast and easy. Whether you are investing on our desktop platform and mobile app or trading on our speedy APIs, BitStamp gives you all the tools you need to reach your crypto goals. Visit bitstamp.net to learn more. Bitstamp for all the ways we crypto. I also am with everyone in this poll not buying the prima facie environmental explanation. There is, of course, a risk here of overcomplicating things. Elon said it's bad for the environment, even followed it up with a chart of Bitcoin's energy expenditure. Maybe we should take him at face value. But what people are having a hard time with is the idea that he just discovered this now.

Starting point is 00:06:28 Nirajadu got about 3.5,000 likes replying to Elon, quote, did you do any research on Bitcoin before buying it? Now, this seems so obvious, but let's turn to Matt Levine, who characterized the whole thing as, quote, Elon got bored by Bitcoin. The salient piece of Levine's post is not that Elon realized Bitcoin was bad for the environment. It's that he realized that the perception of Bitcoin being bad for the environment ran up too aggressively against the perception of him as being a champion of the environment. As far as I can tell, he has only limited interest in manipulating the price of Bitcoin or Dogecoin or Tesla stock or the other assets whose prices he can control with his tweets for profit.

Starting point is 00:07:05 He'll do it for fun, sure, occasionally, but not in a way that serves his rational self-interest. I assume that what actually happened is pretty much what Musk said. He got into cryptocurrency on a whim because it fit with his image of being fun and futuristic and annoying, and then someone explained to him that it doesn't fit with his image of being good for the environment, and on a whim, he decided to cool it on the Bitcoin stuff for a while. Let's expand this out because it seems likely that there are a few dimensions of this perception being an issue thing. The first is, frankly, that Elon might have spent the last couple of months defending this Bitcoin purchase in every conversation he's had and just gotten sick of

Starting point is 00:07:38 it. Lord knows, if you've been here long enough, you've probably gotten sick of having to constantly fight the same fud over and over and over again. The second is about market dynamics. Tesla, like all tech stocks, has fallen pretty far off its all-time highs. There are pretty serious semiconductor shortages that are making it harder and more expensive to make them. The big ETFs that Tesla is a part of, notably Kathy Woods' arc, are also struggling. There is likely a strong need for Tesla to be considered an ESG, an environmental social governance stock for inclusion in some portfolios, even some ETFs or fund holdings. Larry Sermak from the block wrote, Tesla needs to stay ESG, and I'm guessing the stock could be removed from ESG portfolios if they

Starting point is 00:08:15 didn't do this. And Tesla also needs to collect a lot of subsidies tied to its environmental mission. This subsidy piece gets to the third part of the perception being an issue, which has to do with its specific relationship with the government. Tesla does a huge business in carbon credits to the tune of hundreds of millions of dollars a year. If accepting Bitcoin makes that a threat, why do it? Now, two more interpretations that I think are worth noting. The first is to focus on what was actually said versus what wasn't. They didn't say they had sold their Bitcoin. In fact, they said they weren't selling it. So unless they backtrack on that too and announce some sales later, they've still got about $2 billion or more in Bitcoin that they're sitting on. If they really

Starting point is 00:08:51 wanted to get out of the Bitcoin business, wouldn't they wipe their hands of it entirely? Now, I don't want to take this point too far because it's totally possible with these guys that we discover in a few weeks they were slowly selling to not tank the whole position. But for now, they're still hoddling. The other interpretation that is worth noting is just that this is super in character for Elon, aka the vagaries of an eccentric billionaire who probably shouldn't have access to Twitter. There are a lot of people who are neutral to pro on Elon who are now like, fuck this guy. And who are looking at all of his previous claims with skepticism too. I mean, he's literally run a poll in the last few days on whether Tesla should accept Bitcoin,

Starting point is 00:09:25 knowing almost assuredly that they were going to do this. Whatever you think of the dude, it's pretty clear we veered aggressively into the territory of irresponsibility. As Dave Portnoy said it today, it's some shady shit. But I also want to come back for a moment to the government connection to this. I think we're seeing now the beginnings of a convergent fud, which is the environment in China. From the Democrats' perspective, they are racing to catch up to undo the harm they see done to the environment during the Trump administration. They have made climate change a major issue and are looking at new vehicles to enact climate change policy, including via companies via the SEC and via the

Starting point is 00:10:01 Federal Reserve. Meanwhile, the only thing that Democrats and Republicans can agree upon is China. So you have an issue now where people are pointing both to the amount of hash power coming from China as well as to the dirty sources that it represents. Now, you'll know that this is not new fud. In fact, we're repeating cycles over and over again, which is why it's so exhausting. What's new is the potential traction for that fud to get given the particular composition of the U.S. government. It makes Bitcoin's narrative vis-a-vis elected officials much more difficult for the moment. So where do things go from here? And let's start with the short and medium term. First, I think Bitcoin is probably oversold. Like I said, I think crypto markets are such that

Starting point is 00:10:40 moves get radically exacerbated. So not financial advice, obviously, but the dip buyers, myself included, are likely to end up pretty happy about it. Second, I do think that this makes it harder for corporate officers who are trying to get their companies into Bitcoin. We can be confident in the long-term trajectory about Bitcoin without being polyanish about the challenges in the immediate term. I think the corporate conversations to get people to buy this as a corporate treasury asset just got meaningfully more difficult. It doesn't mean that it will stop, but it gave huge fuel to the internal skeptics. Remember, not doing something already takes way less activation energy than doing something, then doing anything. So why not just wait a bit and see how it all plays out, right?

Starting point is 00:11:19 Third, you can certainly see a narrative shift over to non-proof-of-work assets. There have been increasing reports of corporate treasuries and institutional investors getting interested in ETH. If they can actually credibly point to a date for proof-of-state conversion, I could see some of those internal corporate advocates for a Bitcoin allocation shifting at least part of their argument over. Of course, all it takes is one listen to my show with Robbie Gutman over at Nideg to see how high the hill is to climb for Ethereum in corporations, but it's still a potential narrative boom. I would warn Ethereum's and basically everyone else, however, to not get too comfortable dancing on Bitcoin's grave. One, Bitcoin has a habit of making fools of

Starting point is 00:11:55 people who do that, and second, this industry as a whole remains precarious. A wholesale shift away from Bitcoin likely doesn't give everything else the boost that they imagine. Instead, it would radically undermine faith in the whole enterprise. It would validate all those critics who feel that the whole thing is fragile and destined to fail. Longer term, I look at this in two ways. First, as Bitcoin is going to keep on going on. It just minted its highest mining difficulty ever, showing that mining competition remains extraordinarily strong. I also don't think I need to say this to this audience, but even with my caution to take seriously the new challenge that this might represent, it's not even close to in the realm of existential. The second thought,

Starting point is 00:12:32 though, is that it does feel to me increasingly unlikely that we're going to win much with words on the environment, or even gain much ground. It seems to me that what will work is one more demonstration of this promise that we're so excited about of Bitcoin creating a financial incentive to capture energy that would otherwise be lost. And two, a continuation of the shift that is already underway of hash rate away from China. Ultimately, the beauty of Bitcoin is its permissionless nature. So it's not like these are things that we can control with a switch. What's more I've talked on previous episodes about my concern of the balkanization of Bitcoin into clean Bitcoin or approved Bitcoin and not approved Bitcoin, why I think that's not really

Starting point is 00:13:10 viable and why I think we should be pretty aggressively against it. The last thing that I'll say is that, listen, the last 24 hours are kind of why you're here. There is simply no other industry in the world that has this sort of craziness and intrigue with any sort of regularity compared to us. So take a minute to step away from your portfolio tracking app and just appreciate that you're living through history. Anyways, guys, I appreciate you listening as always. Until tomorrow, be safe and take care of each other. Peace. We're witnessing the greatest paradigm shift in finance in modern history. Join thousands of newsmakers and influencers talking the future of money at Consensus by CoinDesk.

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The Breakdown - Et tu, Elon? What’s Really Behind Tesla’s Bitcoin Betrayal

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