Tesla Inc. said on Monday it bought $ 1.5 billion in bitcoin, a purchase that comes after CEO Elon Musk promoted the world’s number 1 digital asset, along with other cryptocurrencies, in recent weeks.
Bitcoin price BTCUSD,
already in a stratospheric increase, it gained further momentum with the announcement, with a single bitcoin changing hands on Monday for $ 42,709, an increase of more than 9%. Prices peaked at a record close to $ 45,000
But one of the main issues surrounding the electric vehicle manufacturer’s decision is whether the change, including the decision to eventually allow the sale of its products to take place in bitcoins, is a prudent use of capital. It’s an issue that’s particularly important, given the violent swings that both share the Tesla TSLA,
and bitcoin are prone to, even if these assets are on an almost uninterrupted journey upwards.
“I think this is a terrible strategy on many, many levels,” commented Christopher Schwarz, associate professor of finance and director of the Center for Investment and Wealth Management at the University of California at Irvine, in an email.
“In essence, this is how to create [currency] risk, since none of Tesla’s suppliers are paid in bitcoin, ”Schwarz told MarketWatch.
An email to the company for comments was not immediately returned.
Musk’s moves take place at a time when Tesla focuses on increasing its production of electric vehicles, with its stock price skyrocketing, but the automaker is still a relatively niche player, despite its market value of more than $ 800 billion.
Tesla’s shares have risen an astonishing 472% in the last 12 months, making it one of the few traditional stocks that surpassed 337% bitcoin gain in the same period,
The Wall Street Journal noted that Tesla took advantage of its rabid investor base and rising share prices to strengthen its cash position, bringing its cash to around $ 19.4 billion at the end of last year, compared to about $ 6.3 billion at the end of 2019.
This means that your current bitcoin allocation represents about 8% of your cash.
“Tesla’s purchase of bitcoin is an unusual use of corporate money, which is normally held in safer and less volatile assets, such as short-term fixed-income securities to ensure liquidity and limit volatility,” Jerry Klein, managing director and partner at Treasury Partners, based in New York, said MarketWatch by email.
“While Tesla shareholders are reacting positively to the news, it remains to be seen how shareholders would react if a drop in bitcoin price negatively affects Tesla’s future earnings,” said Klein. “CFOs are willing to accept risk in their business in general, but not with cash on their balance sheets. Although bitcoin has increased in recent months, it has been very volatile in recent years, ”he said.
For sure, Tesla is not the first company, and probably will not be the last, to distribute part of its holdings in bitcoin. Software company MicroStrategy Inc. MSTR,
last year acquired bitcoin.
MicroStrategy, which organized a virtual conference on the usefulness of bitcoin for businesses, estimates that about $ 50 billion in bitcoin is owned by private and publicly traded companies, citing data from BitcoinTreasuries.org.
MicroStrategy reported that about 8,200 people attended its weekend conference from nearly 7,000 companies.
Back at Tesla, Joe Osha, a Tesla analyst at JMP Securities, told MarketWatch in a telephone interview on Monday afternoon that the electric vehicle maker is often framed as having cash management problems, but that he believes that This is false.
“I think there is a very obsolete narrative around Tesla’s liquidity that is no longer consistent around its balance sheet or cash flow generation,” said Osha.
He argues that companies’ investment in bitcoin is trivial in relation to the scale of their ability to generate cash and aligns with the company’s strategy of being a disruptive one.
“I see this as another step in Tesla’s effort to reinvent how cars are sold and delivered to people,” said Osha, who is referring to Tesla’s customer-direct sales model. Osha estimates that Tesla generated about $ 1.868 billion in free cash flow in the December quarter.
Tesla shares were up 1.1% on the day.
Antoni Trenchev, co-founder and managing partner of Nexo, a cryptocurrency, said it might make some sense for companies to put some of their “dry powder” in bitcoin, especially with interest rates close to 0% and the US dollar under pressure, as measured by the ICE US Dollar Index DXY,
which fell almost 8% compared to last year, show FactSet data.
“Corporations with increasingly dry powder have a more obvious cash management option: partial allocation of BTC,” Trenchev told MarketWatch.
“Sitting on piles of money offers little or no return and is constantly devalued by excessive central bank QE measures. Having a treasury policy that diversifies risk and return, as well as looking at ‘the fastest horse’, is not only a solid policy, but also one that most follows the fundamental principle of maximizing shareholder value, ”he said.