It might appear that the growing acceptance of cryptocurrencies,and bitcoin in particular,has developed sufficient momentum for them to be considered seriously both as an alternate financial asset class and as a medium of exchange.
Neither,however,is yet the case and the implications of Tesla’s “investment” tends to highlight why that is so.
Tesla’s bitcoin “investment” and the emulation it seems to have inspired is about as speculative a play as one could conceive of.
Tesla has replaced $US1.5 billion of the $US19.4 billion of cash and cash equivalents in its balance sheet with bitcoin.
Most companies invest their surplus cash in cash or high-quality and short term fixed interest securities,willing to forego higher returns to ensure that the liquidity is available when needed. Cash and near-cash doesn’t fluctuate wildly in value.
Tesla’s decision to invest $US1.5 billion of its cash holdings - it raised about $US12 billion of cash through equity issues last year to capitalise on a soaring share price – in bitcoin,however,means it is now exposed to an asset that does fluctuate wildly in value.
The accounting standards mean that it has to recognise any paper losses on the value of its bitcoin holdings but can’t record any gains unless and until it actually sell some of them. No-one impairs cash.
Bitcoin prices are volatile. Last year the price ranged from just under $US4000 to a high of nearly $US29,000 and movements of 10 per cent or more in a couple of days haven’t been uncommon during its relatively brief history.
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For a Tesla,which reported a profit of $US721 million last year – after selling $US1.6 billion of regulatory credits – accounting for its bitcoin holdings will add another layer of volatility and complexity to results that have always been volatile and complex. It’s an odd decision for a company that’s supposed to be devoted to making electric vehicles to make.
Its plan to accept bitcoins as payment for its vehicles is also problematic given the volatility of digital currencies. In effect,from its perspective,it will create variable pricing for its sales,with the sales revenue from each vehicle dependent on the price of bitcoin on the day of settlement.
That’s the reason cryptocurrencies have struggled to be regarded as anything but speculative assets.
Merchants are reluctant to accept them because of the uncertainty of their value with each transaction effectively a bet between buyer and seller about the future value of the digital asset when it is cashed out. Most merchants want,indeed need,certainty of pricing to manage their businesses.
The impact of Tesla’s announcement of its plunge into bitcoin highlights another problem with the notion that bitcoin or its digital peers could become mainstream currencies.
If the news of Tesla’s purchases could push the price of bitcoin up by nearly 30 per cent within a week what would any evidence of Tesla selling do to the price? How could Tesla – or a similarly large institutional investor - exit or sell down its holding to cash out profits or limit its losses without causing an implosion in the price?
While the value of Tesla’s bitcoin holding isn’t particularly material (yet?) in the context of its $US783 billion market capitalisation,US regulators and its peers elsewhere will be considering the implications of a broader move by listed companies – or institutional investors - to devote spare liquidity to an especially volatile and,in a crisis,potentially illiquid asset class.
They might also be wondering whether the dramatic surge in the price of bitcoin (and a bizarre 600 per cent increase in the value of joke cryptocurrency Dogecoin,aided by an Elon Musk tweet) is the bell tolling for something unpleasant in financial markets more broadly.
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As some have noted,there is an element of “Tulipmania” to the plunges by investors,particularly retail investors,into the most speculative segments of the markets and other recent episodes of highly unusual trading,like the GameStop short-squeeze.
Tesla’s bitcoin “investment” and the emulation it seems to have inspired is about as speculative a play as one could conceive of.
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