Author: Robert Liu
The BRB Bottomline
In February, Tesla purchased 1.5 billion dollars worth of bitcoin for investment and diversification purposes. Subsequently, its stock price plummeted. Will this polarizing move benefit Tesla in the long-term? Only time will tell.
On Monday, February 8th, American electric vehicle company, Tesla, announced in an SEC filing that it purchased 1.5 billion dollars worth of bitcoin, the world’s most readily traded cryptocurrency. The company, which closed 2020 with approximately 19 billion dollars worth of cash and cash equivalents, revealed that the transaction was made in order to generate “more flexibility to further diversify and maximize returns on our cash.” In addition, the company revealed that it would begin to accept bitcoin as a form of payment for its vehicles. Tesla positions closed Monday, February 8th at $863.42.
Tesla positions closed at $597.95 on Friday, March 5th. This represents a 30.74% decrease from its February 8th close, less than one month prior. Tesla’s significant decrease in evaluation can be largely attributed to a broad market correction in technology stocks, caused by fears of inflation and increased interest rates as the economy begins to reopen following a large rollout of COVID-19 vaccines. Part shortages, specifically global semiconductor shortages, as well as increased competition from other automobile manufacturers such as Ford, Volkswagen, and Porsche, likely also contributed to the stock’s dip. What is unclear, however, is whether or not Tesla’s purchase of bitcoin and subsequent adoption of the cryptocurrency contributed to its downfall.
Some analysts view Tesla’s purchase of bitcoin as a sign that the company has run out of viable internal usage for its capital. One critic, GLJ Research analyst Gordon Johnson, stated, in a report written shortly after Tesla’s bitcoin purchase, “We see this as a sign of desperation from a CEO whose company is facing real competition for the first time ever.” Johnson viewed the bitcoin purchase as a distraction from Tesla’s numerous recent shortcomings – technological inconsistencies, factory delays, etc. In addition, he called bitcoin an “environmental disaster” and questioned why Tesla, a company whose mission is “to accelerate the world’s transition to sustainable energy,” would support bitcoin, a consumer of more energy than entire countries. Bitcoin “mining”, a complex computer-driven process to verify bitcoin transactions, has often been criticized for its vast expenditure of electricity.
There are reasons to believe, however, that Tesla’s investment in bitcoin is actually a clever business strategy. To begin, Tesla’s bitcoin purchase allows the company to hedge against inflation, a huge risk in the upcoming fiscal year. By allocating a portion of its sitting capital into bitcoin, Tesla is able to diversify its assets and lessen the effects that inflation may have on traditional currencies such as the United States dollar. In addition, if the price of bitcoin were to soar upwards, as it has in the past, Tesla will have made significant profits. The CEO of Tesla, Elon Musk, has long established himself as an ardent supporter of bitcoin. Now, he seems to have directly linked this support with his primary business.
Ultimately, it will take time to tell whether or not Musk and Tesla made the right financial decision to invest in bitcoin. Nevertheless, Tesla’s adoption of the cryptocurrency is revolutionary in the world of business. Already, mainstream technology companies such as Square have followed in the footsteps of Tesla and purchased significant amounts of bitcoin. In addition, credit card companies such as Mastercard and major banks such as the Bank of New York, Mellon have accepted cryptocurrencies onto their networks. In light of such events, it is only all the more likely that cryptocurrencies will move to the forefront of the business world.
Robert is a first-year student from Mānoa, Hawaii, studying at the Haas School of Business as part of the Global Management Program. As an investing columnist, he hopes to explore emerging markets such as blockchain, cryptocurrency, trading cards, and more. In addition to investing and journalism, Robert is extremely passionate about the intersection between business and law, and hopes to one day attend law school. In his free time, Robert enjoys thrift shopping, playing beach volleyball, eating sushi, and visiting new places.