According to investors, analysts and financial advisers at some of the country's biggest banks, Tesla's $1.5 billion investment in Bitcoin might be fine for Elon Musk, but it's certainly dangerous for the business that made him the richest person in the world.
Tesla's gamble to go all in on cryptocurrency could hurt its environment bona fides and its credibility with consumers while other car manufacturers enter the EV market.
Given the existing environmental impact of Bitcoin, the agreement flies in the face of the purported interest of Tesla in moving the planet to cleaner sources of energy and trade.
According to some energy investors who wanted to stay anonymous, until the energy grid decarbonizes in places like Russia and China, bitcoin mining remains a fairly dirty business (from an energy perspective).
“We were talking about people doing this in Russia back in 2018 and how they were tapping coal power to run their mining operations,” one investor said. “The cost per transaction from an energy intensity standpoint has only gotten more intense. I don’t see how those things coalesce, climate and crypto.”
The stake renders Tesla one of Bitcoin's biggest corporate holders of Bitcoin but represents a significant portion of the Tesla’s $19 billion in cash and cash equivalents on hand.
“Given the size of their treasury it feels irresponsible, IMO,” wrote one shareholder whose company funded Tesla from its early beginnings. In today's investing environment, the company's decision may be viewed as yet another indication of the insanity in U.S. stock markets and the inherent cynicism of some of its greatest beneficiaries.
Bitcoin holders, meanwhile, celebrated the move, which made the value of their holdings rise by about 18 percent over the course of the day.
“The announcement that Tesla has diversified its treasury through the addition of bitcoin is not surprising, nor is the assuredness implied by an 8% allocation of cash-on-hand. Equal to Tesla’s R&D expenditure for 2020, this investment is significant to the Company and shows a commitment to maximizing shareholder returns,” wrote Stillmark founding partner Alyse Killeen. “Elon Musk has a long history of operating at the precipice of what’s possible technically and setting the trend of what’s to later become common operationally. I suspect the same will be true here, and that Tesla is the first of a larger cohort of publicly-traded companies that will aim to optimize the returns of their cash via bitcoin.”
Industry observers on Wall Street also criticized the company’s big bet on Bitcoin.
“Tesla buying $1.5 billion in BTC is interesting. Am assuming they haven’t hedged it, so they will either be cash-rich in the future or have a hole in the balance sheet. Elon Musk stays wild,” wrote one capital planning executive at a major Wall Street bank who declined to be identified because they were not authorized to speak to the press. “[It’s] not dissimilar from a large company throwing cash into a wildly volatile emerging market currency.”
Nevertheless, the deal is showing returns in the short term. In the course of the day after Tesla made its announcement, the price of bitcoin has increased almost $8,000, or 18.73 percent.
But the investment, as Killeen noted, constitutes the equivalent of the entire research and development budget of the company. The question is also whether any regulator would penalize Musk.
For the last few weeks, Musk has been tweeting his support for Bitcoin and other, more obscure cryptos like Dogecoin, in what seems to be a breach of his Securities and Exchange Commission agreement.
The wealthiest person in the world has previously been fined for his tweeting practices by regulatory authorities. In 2018, the SEC charged Musk with fraud for tweets regarding privatizing the EV company at $420 per share.
Musk finally settled with the SEC, at the expense of his position as Tesla's board chairman and a personal fine of $20 million, with Tesla paying the SEC another $20 million.
The cryptocurrency's instability could affect more than just the profit margin of Tesla, but can even hit its consumers should they use the currency to purchase automobiles.
“Bitcoin jumped over 15% to a new high of $44,000 on Monday. This sort of hype-based price power should be worrying to investors and consumers alike – especially if this is to be used as a medium of exchange,” wrote GlobalData analyst Danyaal Rashid, head of Thematic Research at GlobalData.
“If Elon Musk can help dictate the price of this asset with a tweet or large order, the same could happen to send the price back down. The task of purchasing a vehicle should not be speculative. Consumers who may have thought of buying bitcoin to use as a substitute for fiat – could very easily end up with more or less than they bargained for.”