Tesla said on Monday it had put $1.5bn into Bitcoin
Credit: Reuters
It was the moment the cryptocurrency world had been waiting for. Long seen being on the fringes of finance, struggling for legitimacy and too volatile to be considered a sensible investment, Bitcoin has been viewed with suspicion by regulators and governments.
So Monday’s announcement that Elon Musk’s Tesla, one of the world’s biggest companies, had invested $1.5bn (£1.1bn) in the digital currency felt like a stunning validation.
“Buckle up, we’re passing the Moon and heading to Mars!” tweeted Tyler Winklevoss, one half of the twin brother pair best known for suing Mark Zuckerberg, who have since restyled themselves as cryptocurrency entrepreneurs.
“The entire world will benefit from this leadership,” said Michael Saylor, the head of MicroStrategy, a US software company that, like Tesla, has put much of its reserves into Bitcoin.
Saylor, whose $1.1bn investment in Bitcoin last October has almost trebled since then, is believed to have been the one to push Musk to convert some of Tesla’s holdings into the cryptocurrency.
After the billionaire tweeted an off-colour meme in December, Saylor responded saying converting Tesla’s dollars to Bitcoin would be a “$100bn favour”.
Yes. I have purchased over $1.3 billion in #BTC in past months & would be happy to share my playbook with you offline — from one rocket scientist to another.
— Michael Saylor (@michael_saylor) December 20, 2020
A few weeks later, the company said a subsequent change in its investment policy allowed it to invest in “alternative reserve assets”. On Monday, Tesla also said it expects to receive payments for its cars in Bitcoin in the near future.
Tesla’s bet on Bitcoin came with health warnings. It said that “the prices of digital assets have been in the past and may continue to be highly volatile”, and that “the extent to which securities laws or other regulations apply… is unclear”. It added that owning cryptocurrencies makes the company a target for hackers.
The company’s investment also accounts for less than one tenth of the company’s cash holdings, which total more than $19bn.
But the move still represents a significant stamp of approval from one of the world’s most influential business leaders. Bitcoin’s price rose around 15pc on Monday according to Coindesk, hitting a new high of $44,801.
It has already been a smart investment for Tesla. Bitcoin traded under $38,000 for much of January, so the company’s paper returns are already expected to sit in the hundreds of millions.
The longer-term question is whether the cryptocurrency, once derided as the tool of online drug dealers and speculators, has emerged as a viable alternative to the cash, bonds and low risk funds where most companies and people keep their savings, and as an alternative payment method.
Critics of Bitcoin have pointed to previous wild swings in its price, its high electricity consumption, and the legal uncertainty that has surrounded it. Supporters say it is a more efficient version of gold, inflation proof and not subject to the whims of central banks.
“Ultimately, investors and other industry watchers will be watching this closely to see if other corporations follow the lead of Tesla on this crypto path,” said Daniel Ives of Wedbush Securities.
Tesla’s Bitcoin buy is the biggest dollar investment by a company to date according to Bitcoin Treasuries, a website that ranks corporate investments in the asset. But it is not the first. Last October, Jack Dorsey’s fintech company Square said it had bought $50m in Bitcoin, around 1pc of its assets.
Constantin Kogan, managing director of Wave Financial, a crypto asset manager, says Tesla’s move is likely to mean others follow. “What Tesla did is they de-risked the acquisition of Bitcoin by public companies and accelerated the transformation of corporate balance sheets. They are one of the top S&P 500 companies and others will follow,” he said.
How to buy Bitcoin
Mr Kogan says more companies investing in Bitcoin would make the cryptocurrency more stable, since its biggest investors would not be constantly buying and selling.
Sheel Monhot, a fintech investor, said it would have appeal as a hedge against inflation: one of the supposed appeals of the currency is that the total number in circulation cannot exceed 21 million, meaning in theory its value cannot be eroded by producing more. “I do think a lot of CFOs [chief financial officers] are thinking, ‘Hey maybe we should be putting our money into Bitcoin,’” he said.
Gavin Brown, a financial technology professor at the University of Liverpool, points out there are plenty of other reasons Musk may have wanted to tie Tesla to Bitcoin than pure financial acumen. Becoming involved in cryptocurrency speaks to Tesla’s image as being forward-thinking, as well as winning kudos among online retail investors interested in Bitcoin.
For this reason, Brown is sceptical of seeing Tesla’s move as legitimising Bitcoin. “If it was ExxonMobil, if it was a more traditional firm, it actually would have been a stronger signal,” he says.
Tesla’s commitment to taking payments in cryptocurrency may be less significant. It said accepting Bitcoin will be limited at first and that the company may liquidate any payments into cash upon receipt — suggesting it is only so willing to tie its future to the currency.
With the $36,490 price of an entry-level Model 3 now well below one Bitcoin, a few enthusiasts who have struck it rich may be willing to pay with cryptocurrency, but others are just as likely to hold onto their Bitcoin, hoping it will continue to rise.
And with current fees for a Bitcoin transfer sitting at 0.00026 BTC (£8.30), many purchases smaller than a car will be too costly to be made with the currency.
Tesla’s investment could well clear the way for other companies to back Bitcoin. But institutions have already started to embrace it. PayPal, which Musk co-founded in 1999, recently started to let users buy and sell cryptocurrency and investment giant Fidelity launched its own crypto fund last summer. Musk may simply feel he is getting ahead of the movement, rather than leading it.
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