Does Elon Musk know something I don’t? I have no doubt that he does – but probably not about Bitcoin.
Early this week it was revealed that Tesla had bought $1.5 billion worth of Bitcoin and, further, that it was aiming to allow customers to use the cryptocurrency to buy its cars. Bitcoin, already the hottest investment of the past two years, leapt an additional 14% to an all-time high.
Musk in many ways is a true visionary. But even visionaries don’t always get things right. Maybe, with Tesla teeming with cash, he’s just having fun. But if he’s really betting that Bitcoin will hold its value over the longer term and serve as a currency for purchasing Teslas, the fun won’t last long. And Tesla investors are unlikely to get the last laugh. In fact, I see a disturbing possibility that if Musk persists in promoting Bitcoin, he could wreak havoc on Tesla via arousing the wrath of China.
Bitcoin may rise more over the shorter term. But longer term I see no chance it will hold up as a store of value – as an asset that, for instance, might compete with gold, whose long-term prospects I believe are sensational (as I explore in depth in my latest book China’s Rise and the New Age of Gold).
Why? For one thing – and there are other reasons as well – China won’t let it happen, because a triumphant Bitcoin would run counter to China’s plans for its own digital currency, the e-yuan. While China has banned Bitcoin exchange trading on the mainland, the cryptocurrency is traded on exchanges in other Asian countries and in Hong Kong. China plans to use Hong Kong as a hub for international use of the e-yuan in cross-border transactions. If Bitcoin continues to make waves, China would view it as a threat to e-yuan adoption and would not hesitate to quash Bitcoin.
And it has the means to do so. When it comes to both Bitcoin and Tesla, China holds all the cards. Putting aside Tesla for a moment, realize that China currently carries out 65% of global Bitcoin mining. That on its own is enough for China, if it chooses, to create what’s known as a “double spend.” This refers to a situation in which a single Bitcoin is used for multiple transactions, the antithesis of what is supposed to be the case. In effect, it would create counterfeit Bitcoin, thereby destroying the entire ecosystem on which Bitcoin is based.
China’s government wouldn’t even have to acknowledge its role. It could say it was the miners who did it. Or it could say that (wink wink) it was the Russians and Iranians (who also do a fair amount of Bitcoin mining and who are essentially allied with China) who participated.
For Tesla, running afoul of China could be devastating. China is the world’s biggest car market and is essential to Tesla’s growth and future. Earlier this week Bloomberg ran an article by one of its most astute commentators, Liam Denning, on the Tesla-Bitcoin intersection. He reported that Musk has been “summoned by Chinese regulators to answer complaints about quality and safety issues with its cars.” To my ears, the word “summoned” evokes recent memories of China’s hardening attitude towards Alibaba’s Jack Ma, as he planned to launch a now-canceled fintech company that could have threatened the e-yuan. In today’s world, China very much fulfills the role of the old City Hall that it never pays to fight. Musk may find that out sooner rather than later.