On Monday February the 8th, 2021 Elon Musk’s Tesla announced in SEC filings that it had purchased $1.5 billion in Bitcoin BTC. Furthermore, the automaker announced it would accept BTC as payment for its electric cars. This move follows Michael Saylor’s Microstrategy purchases, which has leveraged all available cash (and even raised new cash through debt financing) to buy up BTC. Michael Saylor, who was until recently a Bitcoin skeptic, saw an opportunity to turn his increasingly unsuccessful business intelligence firm around by capitalizing on the crypto hype. Equally, Musk saw an opportunity to both profit from the crypto hype and tie the Tesla brand to this hype to massively increase his social media following.
At the time of writing, Tesla stock is down a whopping 31% since the announcement, wiping out nearly $260 billion in market capitalization and greatly under performing the market which is up more than 5% since February. This may seem odd at first since total profits (combining realized and unrealized) on their crypto holdings has been more than they have ever made selling cars and carbon offsets.
However, repeating these returns simply by speculating on the crypto markets is probably unsustainable since for each time they buy, they will need to find buyers who will want to take the coins off them at a higher price, in other words, the inflow of new money needs to keep increasing. Most money entering the crypto markets nowadays is purely speculative in nature. People are seeing people around them making money and fear the will be missing out if they don’t get in. As seen in early 2020, manias can easily reverse and since there is very little non-speculative demand for crypto liquidity can dry up almost instantly sending prices crashing down (Bitcoin went down 50% on one day in March).
Moreover, selling their Bitcoin position may result in bad publicity from the crypto community. When Tesla announced they sold 10% of their crypto position under the cover of “proving liquidity” (probably in order to boost Q1 earnings numbers) they got tons on flack on social media platforms such as twitter and reddit. There’s a lot of overlap between the people who are into crypto and the people who buy Tesla stock and products. Obviously, Tesla doesn’t want to alienate this part of the fan base, which is why they have to be careful when it comes to handling the Bitcoin position. On the other hand Tesla has to mind its shareholders, who need return on capital. In particular, Musk is dependent on Tesla’s stock price as he has taken massive loans against his shares to fund his lifestyle. In this contest, the wills of the shareholders will likely win and Tesla will use any excuse to dump their holdings at a profit. This can be seen by them dropping the option of buying a Tesla car using Bitcoin, because it is supposedly “bad for the environment”, something which even it is true, they would have known when they first announced the option.
Another thing to consider is the size of the Bitcoin purchase relative to the Research & Development (R&D) budget. This may be a surprise to some readers, but their BTC purchase was actually larger than their entire annual budget for R&D. This may well have been the reason for the large selloff, as this is a clear signal that they have run out of ideas. Surely, with all their supposed ‘tech talent’, they could find a way to improve their cars, manufacturing processes or even create a completely new product or service (where are the robo-taxis Musk promised would arrive in 2020?) that would earn a greater discounted return on capital than speculating on the latest fad?
As for the future for bitcoin price, given that more companies could potentially enter hoping to easily boost their earnings numbers by speculating on crypto, it seems it could go up by quite an amount since the free float is low and it therefore requires relatively modest sums to pump it higher. The risk Bitcoin (BTC) poses for the economy at large however, would then increase since the economy would increasingly depend on the prices of a fundamentally purely speculative asset.
Looking at the past, a similar phenomenon was also observed in the Nikkei bubble, where large Japanese firms were “earning” more money on real estate speculation than operating their businesses. And as we know, this bubble ended in a 80% decline in the Japanese stock market and a 30 year recession for the country.
Everyone is is putting his interest at the fore front, I knew Elon is only doing business with all these fiasco.