Tesla Inc. said Monday it bought $ 1.5 billion in bitcoins, a purchase that comes after CEO Elon Musk promoted the world’s No. 1 digital asset, along with other cryptocurrencies, in recent weeks.
Bitcoin Price BTCUSD,
already on a stratospheric rise, it earned an additional ad supplement, with a single bitcoin handshake on Monday at $ 42,709, up 9%. Prices peaked at around $ 45,000
But one of the key questions revolving around the electric vehicle manufacturer’s decision is whether the move, including the decision to allow the sale of its products in bitcoins, is a prudent use of capital. It is an issue that is particularly important given the wild changes that both shares of Tesla TSLA,
and bitcoins are prone, even if both assets have passed almost uninterruptedly.
“I think this is a horrible strategy on many, many levels,” Christopher Schwarz, an associate professor of finance and director of faculty at the University of California’s Center for Investment and Wealth Management in Irvine, commented by email.
“In essence, this is how to create [currency] risk, as none of Tesla’s suppliers pay in bitcoin, ”Schwarz told MarketWatch.
An email was not immediately returned to the company for comment.
Musk’s moves come as Tesla focuses on increasing its production of electric vehicles, with a rise in stock prices, but the automaker remains a relatively niche player despite its market value of more than 800,000. millions of dollars.
Tesla shares have risen 472% in the last 12 months, making it one of the few traditional stocks to outperform Bitcoin’s 337% gain in the same stretch,
The Wall Street Journal noted that Tesla has taken advantage of its rabid investor base and its rising stock price to strengthen its cash position, bringing its cash holdings to about $ 19.4 billion at the end of the year. last year, compared to $ 6.3 billion at the end of 2019.
This means that their current bitcoin allocation represents approximately 8% of their cash holdings.
“Tesla’s bitcoin purchase is an unusual use of corporate cash, which is typically held in safer, less volatile assets, such as short-term fixed-income securities to ensure liquidity and limit volatility,” he said. Jerry Klein, managing director and partner of 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 would react if a decline in the price of Bitcoin negatively affects Tesla’s future earnings,” Klein said. “CFOs are willing to accept risks in their global business, but not with the cash on their balance sheet. While Bitcoin has grown in recent months, it has been very volatile in recent years, ”he said.
Of course, Tesla is not the first company, and probably not the last, to distribute a share of the shares in bitcoin. Software company MicroStrategy Inc. MSTR,
last year he acquired something bitcoin and has been a champion of other companies that do.
MicroStrategy, which recently hosted a virtual conference on the usefulness of bitcoin for businesses, estimates that approximately $ 50 billion in bitcoin is owned by private, publicly traded companies, citing data from BitcoinTreasuries.org.
MicroStrategy reported that about 7,000 companies attended the weekend conference of about 8,200 people.
Back at Tesla, Joe Osha, a Tesla analyst at JMP Securities, told MarketWatch in a phone interview Monday afternoon that the electric vehicle maker is often embroiled in cash management problems, but believes this is a false assessment.
“I think there’s this very stale story around Tesla’s liquidity that is no longer consistent around its balance sheet or its generation of cash flows,” Osha said.
He claims that companies ’investment in bitcoin is trivial in relation to their ability to generate cash and aligns with the company’s strategy of being a disruptor.
“I see it as one more step in Tesla’s effort to reinvent how cars are sold and delivered to people,” said Osha, who refers to the direct sales model to Tesla 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 Tepper School of Business, told MarketWatch that Bitcoin’s volatility makes it a difficult asset to serve as a reserve asset for companies or a medium of exchange.
“Here you have a volatility that is about ten times higher than the euro,” said the professor, who served as economist and director of the Securities and Exchange Commission’s Economic Analysis Office (2004-07) .
“This move poses many challenges for a corporation [bitcoin] in its balance, but it also poses challenges from the point of view of the consumer “, he said.
Shares of Tesla closed up 1.3% on Monday.
Antoni Trenchev, co-founder and managing partner of Nexo, a cryptocurrency lender, said it may make sense for companies to put some of their “dry dust” on bitcoin, especially with interest rates close to 0% and the US dollar under pressure, measured by the ICE DXY US Dollar Index,
which has fallen by almost 8% over the past year, FactSet data show.
“Growing dry powder companies have a more obvious cash management option: the partial allocation of BTC,” Trenchev told MarketWatch.
“Sitting in piles of cash offers little or no performance and is constantly devalued by the excessive QE measures of central banks. Having a treasury policy that diversifies risk and return, as well as examining the “fastest horse,” is not only a sound policy, but also one that most adheres to the key principle of maximizing value for to shareholders, ”he said.