Tesla Inc. said Monday it bought $ 1.5 billion in bitcoin, a move that comes after CEO Elon Musk promoted the world’s number one digital asset, along with other cryptocurrencies, in recent weeks.
Bitcoin BTCUSD price,
already rising stratospherically, obtained an additional supplement from the announcement, with a single change of hands bitcoin Monday, to $ 42,709, up more than 9%. Prices hit a record nearly $ 45,000
One of the key questions revolving around the electric vehicle manufacturer’s decision is whether the move, including the decision to eventually allow the sale of its products to take place in bitcoin, is a prudent use of capital. This is a particularly important question, given the wild fluctuations that both shares of Tesla TSLA,
and bitcoin are prone to, even if these assets were both in an almost uninterrupted journey.
“I think this is a terrible strategy on many, many levels,” said Christopher Schwarz, an associate professor of finance and director of the faculty at the Center for Investment and Wealth Management at the University of California, Irvine.
“It simply came to our notice then [currency] risk, because none of Tesla’s suppliers are paid in bitcoin, “Schwarz told MarketWatch.
An email to the company for feedback was not returned immediately.
Musk’s moves come as Tesla focuses on increasing production of electric vehicles, with stock prices rising, but the automaker is still a relatively niche player, despite its market value of more than $ 800 billion.
Tesla shares have risen 472% in the last 12 months, making it one of the few traditional stocks to surpass bitcoin’s 337% gain over the same period,
The Wall Street Journal reported that Tesla took advantage of its base of fierce investors and the rally of stock prices to strengthen its cash position, bringing its cash holdings to about $ 19.4 billion at the end of last year, from about $ 6.3 billion at the end of 2019.
This means that its current bitcoin allocation represents about 8% of its cash holdings.
“Acquiring bitcoin from Tesla is an unusual use of corporate cash, which is usually held in safer and less volatile assets, such as short-term fixed income securities to ensure liquidity and limit volatility,” Jerry Klein, general manager and partner at New York-based Treasury Partners, told MarketWatch by email.
“While Tesla shareholders are reacting positively to the news, it remains to be seen how shareholders will react if a drop in the price of bitcoin negatively affects Tesla’s future earnings,” Klein said. “CFOs are willing to accept risks in their general activity, but not with cash on the balance sheet. While bitcoin has grown in recent months, it has been very volatile in recent years, “he said.
Certainly, Tesla is not the first company and probably will not be the last, which distributes part of the shares in bitcoin. Software company MicroStrategy Inc. MSTR,
last year he bought somce bitcoin and was a champion of other corporations.
MicroStrategy, which recently hosted a virtual conference on the usefulness of bitcoin for corporations, estimates that bitcoin worth about $ 50 billion is owned by private and publicly traded companies, citing data from BitcoinTreasuries.org.
MicroStrategy reported that approximately 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 Monday afternoon that the electric vehicle manufacturer is often considered to have cash management problems, but considers it a false evaluation.
“I think there is this outdated narrative around Tesla’s liquidity that is no longer consistent in terms of balance sheet or cash flow generation,” Osha said.
He argues that companies’ investments in bitcoin are trivial in relation to the size of their ability to generate cash and aligns with the company’s strategy of being disruptive.
“I see it as another step in Tesla’s effort to reinvent the way cars are sold and delivered to people,” said Osha, who refers to the Tesla model for direct sales to customers. Osha estimates that Tesla generated about $ 1.868 billion in free cash flow in the December quarter.
Chester Spatt, a professor at Carnegie Mellon University’s School of Business, told MarketWatch that bitcoin volatility makes it a difficult asset to serve as a reserve asset for corporations or as a medium of exchange.
“You have a volatility here, about 10 times higher than the euro,” said the professor, who was an economist and director of the Securities and Exchange Commission’s Economic Analysis Office from 2004-2007.
“This move raises a lot of challenges for a corporation [bitcoin] in their balance sheet, but it also represents challenges from the consumer’s point of view “, he said.
Tesla shares closed up 1.3% on Monday.
Antoni Trenchev, co-founder and managing partner of Nexo, a crypto borrower, said it might make sense for corporations to put some of the “dry powder” in bitcoin, especially with interest rates close to 0% and the US dollar below pressure. , measured by the ICE US Dollar DXY index,
which has dropped by almost 8% in the last year, FactSet data show.
“Growing dry powder corporations have the most obvious cash management option: the partial allocation of BTC,” Trenchev told MarketWatch.
“Laying on piles of cash offers little or no profitability and is constantly devaluing due to excessive QE measures by central banks. “Having a treasury policy that diversifies risk and return, as well as searching for the ‘fastest horse,’ is not only a solid policy, but one that adheres most to the key principle of maximizing shareholder value.” he.