Tesla, El Salvador and CBDCs: Has Bitcoin’s moment of truth come?

The meaning of El Salvador in Spanish is ‘The Saviour’. Recently, the Central American country with a land mass smaller than Meghalaya almost became a saviour for Bitcoin, the most popular of cryptocurrencies. The country officially approved Bitcoin as legal tender, joining the US Dollar as official currency. However, it barely compensated for the steep fall in price triggered by last month’s announcement from electric carmaker Tesla that it will no longer accept the cryptocurrency as payments, due to environmental concerns.

If anything, this exposes the inherent chink in the bitcoin armour.

El Salvador has a population of 6.5 million. Tesla sold about 500,000 units in 2020. It should be a no-brainer that a country adopting the currency is more significant for Bitcoin’s fortunes than the latest whim of a mercurial entrepreneur. However, the market appears to have brushed aside the embrace by an entire country, albeit small.

It isn’t difficult to see why. The only value proposition for Bitcoin as a currency is that one day in the future, it will become a universally-accepted currency. If not replace the Euro and the US Dollar, it aims to at least be in that league. Put differently, the reason for Bitcoin’s stratospheric surge in price is the possibility that one day it will be universally demanded, and since the total supply of Bitcoins is capped at 21 million, any price it trades at today is supposed to be an under-valuation.

Therefore, the Bitcoin investment is currently an ‘all or nothing’ punt. This is not to say that Bitcoin cannot have an existence as a pure asset class (just like any asset, let’s say, gold). But if it is merely an asset among many others, including many cryptocurrencies, there is no reason for its steep surge in price. Remember, Bitcoin fanatics promise a 10-fold increase, if not more, from the highs reached earlier this year.

Before we go any further, it also important to keep two other facts in mind. One, the cryptocurrency that is Bitcoin must be differentiated from the broader term digital currencies — including the ones being explored or experimented with by nations, including India, and central banks. In fact, as we will see shortly, the latter will almost certainly negate Bitcoin’s relevance and value-proposition. Perhaps the closest allegory is how the Indian Cricket League (ICL) had to practically fold once the BCCI-backed Indian Premier League (IPL) took wings. Two, Bitcoin is also not synonymous with ‘Blockchain-based technology’. Bitcoin uses blockchain technology, but much of the innovation happening in the space, such as Non-Fungible Tokens (NFTs), are not reliant on Bitcoin per se.

Tesla’s betrayal (if one could call it that), therefore, cuts much deeper than merely a lost opportunity. With countries being antagonistic to the rise of a rival currency beyond the purview of regulation, Bitcoin’s great hope was that the world’s most popular brands embrace it, therefore forcing the governments’ hand. What greater name than Tesla, which symbolised, in the popular imagination, everything futuristic.

End Of The Dream?

The problem facing cryptocurrencies is multi-fold. First, the bad press about how energy-intensive crypto-mining will not go away any time soon. It may be irrational — after-all, nobody counts the energy consumed by the banking or technology industries; but its present energy-intensiveness is a pre-requisite for the technology to function.

Second and even more significant, from the point of governments and the larger public, is how it is being associated with crimes that affect the people. Major disruptive events in the last few months were a result of ransoms demanded in Bitcoin. Again, Bitcoins have been used for cyber-crimes for years now, but the association was never this pronounced.

It is just a matter of time before the most accommodating of economies clamp down on the currency. Christopher Wray, Director of America’s Federal Bureau of Investigation recently said that the use of cryptocurrencies for cybercrime was a “significant issue” that is likely to become a “bigger and bigger problem for law enforcement”.

Third, is that after vacillating for years, countries have begun seriously exploring launching their own digital currencies. To be sure, none of these sovereign-backed digital currencies are really substitutes for Bitcoin. Contrary to the complete anonymity promised by Bitcoin, sovereign digital currencies, or central bank digital currencies (CBDCs), might result in complete transparency, where the government might have a tab on every payment made through these currencies. These currencies will also be safer for users — the non-traceability of Bitcoin transactions, combined with their irreversibility meant that lost or stolen Bitcoins were lost to their owners forever, rarely with any recourse.

For those who have followed the growth of the crypto-movement objectively, this really does not come as a surprise. It started out with the promise of an alternative to government-backed currency. It appears to now be completely at the mercy of governments creating their own variants.