CMI Explains: Tesla Buys $1.5bn in Bitcoin
Elon Musk, the world’s richest person and the chief executive of Tesla, enjoys expressing his support for digital currencies. The show of his power could be observed in last days of January, when the new hashtag #bitcoin in the carmaker’s Twitter bio made Bitcoin skyrocket by nearly 20%. However, cryptocurrency market is not the only one which has met with Musk’s enthusiastic words of encouragement. His cryptic tweets have recently targeted GameStop share price when he shared a link to a community of WallStreetBets, as well as Polish CD Projekt, after the billionaire tweeted that he liked the company’s recent game Cyberpunk 2077. Musk’s playful behaviour found many fans and critics among his followers. However, regardless of these varying opinions, hardly anyone could predict the next steps of the Tesla’s CEO.
On Monday 8th of February, a new securities filing from Tesla revealed that the company had purchased $1.5bn worth of Bitcoin back in January. Such direct and significant involvement of the electric vehicle producer in the cryptocurrency market immediately caused a boom in Bitcoin’s value. Shortly after the spectacular news, it achieved the new record value of over $47,000. The adjustments of following days have not managed to push the value below $40,000.
Bitcoin’s surge after a release of the Tesla’s securities filing
Big money at play
What does the purchase mean for the company? Well, firstly, no matter how enormous $1.5 billion worth bitcoin portfolio seems, it still makes less than 10% of Tesla’s cash balance and not even 1% of its total market capitalisation. Even if these percentage figures seem not as crazy, some commentators underline that Tesla’s purchase could cover its entire R&D budget, and others worry whether this move will bring the company nothing but trouble. For instance, Jerry Klein, a managing director at Treasury Partners (an investment management firm in New York), acknowledges that usually “corporations invest their cash in very high quality, short-term fixed income securities, and are willing to accept a relatively low rate of return” (Financial Times). Clearly, Tesla has not followed these guidelines.
Certainly, Musk is aware of the volatility of bitcoin and the risk behind this investment, however the step towards digital currency probably means something more than just an investment idea. It is not a coincidence that Tesla has recently announced that payments in bitcoin would be available soon in its stores (although in a limited way). Hence, it remains a quite interesting question whether the electric cars company carves a new path to the future of digital payments and decentralised finance. It is likely that other companies will soon feel the pressure to recognise the growing worthiness of digital assets and the technology behind them, and then more institutional investors will be attracted by the yet to be fully discovered potential of cryptocurrencies.
But coming back to earth, let us eye a current accounting situation of Tesla in the light of the bitcoin purchase. Should it count as a currency? According to the company’s declaration, it will “account for digital assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other”. Further it provides an explanation that “the digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition” (Form 10-K, p. 106). In short, the firm committed itself to regularly revalue the bitcoin portfolio and treat all potential loses coming from its declining value as a part of an income statement. The potential profits on the other hand will not be treated in the same way – they can be noted only after realising the profits and selling given amount of the digital currency. The instant observation comes up that the crypto investment position in the company’s accounting is doomed to a downside skewness. This adds even more uncertainty to already modified shape of Tesla’s profits – the firm has been struggling to maintain a stable positive profit margins from the cars production itself and it has been heavily compensated by sales of emission regulatory credits. Adding to this differences in bitcoin’s values would make the company’s profits even more abstract.
What is coming next?
The next few months will show the truth – assuming the volatility of bitcoin prices from the 2020 year, we can only imagine how much space to fall bitcoin now has. On the other hand, though, Tesla may have already started to shape the future of digital finance, openly manifesting self-confidence of its CEO through his peculiar, although brave decisions. There is definitely an interesting show to come…