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Wednesday February 10, 2021
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Tesla’s big Bitcoin bet
Tesla’s (TSLA) revelation on Monday that it bought $ 1.5 billion worth of bitcoin (BTC-USD) has already paid off for the electric vehicle maker, with its holdings growing 35% on Tuesday, according to an analysis by Yahoo Finance. But the good times won’t last forever thanks to the cryptocurrency’s erratic fluctuations.
“It’s extremely unusual for a business to take risks with cash,” Jerry Klein, managing director and partner of Treasury Partners, told Yahoo Finance. “Most companies have security priorities, followed by liquidity and yield being a distant third. So to see a company doing anything outside of this framework is quite surprising. “
To give you an idea of the intensity of bitcoin’s price changes, look no further than its 52-week price range. On February 8, 2020, the currency was trading at $ 4,106 per coin. As of Tuesday, it stood at $ 47,899. It’s a huge price hike and a quick way for the automaker to make more money for research and development and other expenses.
But bitcoin has already collapsed, which means Tesla’s huge investment could backfire if digital currency crashes. Such a move would not only reduce the liquidity Tesla has available to make purchases and acquisitions, but would also seriously harm future earnings reports. This in turn could erode shareholder confidence in the high-tech automaker.
Plus, Tesla doesn’t just invest in bitcoin. It should also start accepting bitcoin payments for its products and services. In its SEC filing, the company said it would start accepting bitcoin in the near future, noting that it “may or may not liquidate” the cryptocurrency after receiving it.
Bitcoin’s volatility is not always positive
A drop in the price of bitcoin would likely see shareholders start to question Tesla’s thinking, Klein explained. Shareholders are generally more comfortable with the risks companies run in doing their business, but not so much with how they invest their cash, he added.
“Today we see Tesla shareholders responding favorably to the Bitcoin news; however, it is not known how they will react if a drop in the value of bitcoin caused the company to miss earnings estimates by a quarter, ”Klein said.
Tesla has so far benefited from its bitcoin investment, but it’s unclear how long that will last. The cryptocurrency regularly experiences large upward and downward value changes, such as its collapse from around $ 20,000 to $ 3,000 between December 2017 and December 2018. This type of loss could devastate Tesla’s balance sheet .
In addition to damaging its balance sheet, Tesla’s bitcoin investment could leave it exposed to cyberattacks from hackers seeking to steal the company’s assets. Hundreds of millions of dollars in cryptocurrency have been stolen throughout 2020 through various cyber attacks and scams. And while Tesla may have robust security procedures, he is not invulnerable to such attacks.
Finally, there are the diametrically opposed positions of running a company like Tesla, which is supposed to cut carbon emissions by getting fossil fuel vehicles off the road and investing in a cryptocurrency like bitcoin, which requires huge amounts of energy to harness.
The total amount of electricity consumed each year in Bitcoin mining exceeds Argentina’s annual electricity consumption and almost as much as that of Norway, according to the Judge Business School at the University of Cambridge, which measures the energy consumption of Bitcoin on a near constant basis.
And as interest in bitcoin continues to grow, mining becomes more difficult for the computers in charge of the operation, consuming even more power. This energy leak radically conflicts with Tesla’s mission to “accelerate the world’s transition to sustainable energy.”
What is Tesla thinking?
So why did Tesla take the Bitcoin train? Most companies invest in short-term fixed income securities that they can liquidate if they need cash for things like unexpected costs, research and development, or acquisitions.
Of course, Tesla isn’t the only big company to jump into bitcoin. PayPal allows users to buy, sell, and hold bitcoin, and Square bought $ 50 million in bitcoin in October. CEO Elon Musk can drive cryptocurrency prices up just by mentioning them on Twitter, like when joke-based cryptocurrency (DOGE) hit a record high after he and other big names mentioned it on Twitter.
There is certainly an opportunity for Tesla to see its cash reserves increase due to the rise in bitcoin prices – this additional paste could come in handy as part of the automaker’s global expansion.
In the fourth quarter, Tesla reported free cash flow of $ 1.9 billion and cash and cash equivalents of $ 19.4 billion. And the company has built this war chest up to 209% year on year. Still, it has less cash than automakers like, say, Ford (F), which ended the last quarter with nearly $ 31 billion in cash.
Buying $ 1.5 billion worth of bitcoin, which has risen from $ 9,856 to $ 47,899 in the past 12 months, could certainly help Tesla build up its reserves in a relatively short period of time.
And as Yahoo Finance’s Jared Blikre pointed out, Tesla’s investment has already paid off, with the investment increasing by $ 561 million as of Tuesday.
But as Wedbush analyst Dan Ives points out, Tesla investors shouldn’t get carried away by the current bitcoin hype and continue to focus on its production of electric vehicles. “[W]We don’t want the bitcoin mania to overshadow the underlying story of EV hyper growth taking place at Tesla. This is where the fundamental driver of share value lies, ”he said.
But what if the bitcoin craze ends? In that case, it might be difficult for investors to ignore the EV maker’s decision to buy the unpredictable digital currency.
Through Daniel howley, technical editor. Follow him on @DanielHowley
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