Tesla has once again been dominating the headlines over the past week, after the company made a historic $1.5 billion Bitcoin purchase. The huge cryptocurrency investment was not entirely surprising, given CEO Elon Musk’s public praise for Bitcoin for some time now.
Many analysts had always seen it as purely a matter of time before Musk entered the cryptocurrency marketplace, though few had predicted such a monumental investment.
Tesla’s $1.5 billion Bitcoin investment spurred another meteoric rise in the value of the world’s number-one digital asset. Having recently skyrocketed beyond $40,000 for the first time, the value of a single Bitcoin briefly broke the $50,000 barrier before settling back at $47,000 by Monday, February 15.
Confidence in cryptocurrency in general spiked alongside the value of Bitcoin, which, on the basis of this single purchase, increased by around 9%.
But at the same time, economists and market watchers are questioning whether a major investment in Bitcoin represents a savvy use of the firm’s funds. Whether Tesla is wise to begin accepting Bitcoins for purchases of its products has also been called into question.
Differences of opinion
Unsurprisingly, Tesla’s cryptocurrency investment has divided experts right down the middle. In an interview with MarketWatch, Christopher Schwarz from the Centre for Investment and Wealth Management at the University of California insisted Musk had made a mistake.
“I think this is an awful strategy on many, many levels,” he said.
“In essence, this is like creating [currency] risk since none of Tesla’s suppliers are paid in Bitcoin.”
Tesla has done little other than delight its stakeholders and shareholders as of late. Within the past 12 months alone, Tesla share prices have increased by an astonishing 472%. This is more than what Bitcoin itself has gained over the same period of time, achieving growth of 337%.
Jerry Klein, managing director and partner at Treasury Partners, likewise told MarketWatch that the decision to invest in Bitcoin was unusual and unexpected.
“Tesla’s purchase of Bitcoin is an unusual use of corporate cash, which is typically held in safer and less volatile assets, such as short-term fixed-income securities, to ensure liquidity and limit volatility,” he said.
“While Tesla shareholders are reacting positively to the news, it remains to be seen how shareholders would react if a decline in Bitcoin’s price negatively affects Tesla’s future earnings.”
“CFOs are willing to accept risk in their overall business, but not with the cash on their balance sheet. While Bitcoin has been surging in recent months, it’s been very volatile over the past few years.”
Meanwhile, there are those who believe simply allowing capital to effectively ‘go to waste’ with traditional holding options is actually the biggest mistake companies like Tesla can make.
“Corporations with ever-increasing dry powder have a most obvious cash management option: partial BTC allocation,” commented co-founder of Nexon, Antoni Trenched.
“Sitting on piles of cash offers little to no return and gets constantly devalued by central banks’ excessive QE measures. Having a Treasury policy that diversifies risk and return, as well as looking into ‘the fastest horse’, is not only a sound policy but is also the one that most adheres to the key principle of maximising shareholder value.”