Tesla Inc. said Monday it bought $ 1.5 billion in bitcoin, a purchase that comes after CEO Elon Musk last week promoted the world’s number one digital asset, along with other cryptocurrencies.
Bitcoin’s price BTCUSD,
already in a stratospheric rise, got an additional fill of the announcement, with a single bitcoin swapping hands on Monday from $ 42,709, which is more than 9%. Prices hit a record high of close to $ 45,000
But one of the key questions surrounding the decision of the electric vehicle manufacturer is whether the move, including the decision to eventually allow the sale of its products in bitcoins, is a prudent use of capital. This is a question that is especially important given the wild swing that both shares of Tesla TSLA,
and bitcoin tends to do so, even though the assets have both ridden almost uninterruptedly.
“I think this is a terrible strategy on many, many levels,” Christopher Schwarz, associate professor of finance and faculty director of the Center for Investment and Wealth Management at the University of California at Irvine, commented by email.
‘In essence, it’s like creating [currency] risk because none of Tesla’s suppliers are paid in bitcoin, ”Schwarz told MarketWatch.
An email to the company for comment was not returned immediately.
Musk’s actions come as Tesla focuses on increasing its production of electric vehicles, with its share price rising, but the carmaker is still a relative niche player, despite its market value of more than $ 800 billion.
Shares of Tesla have been striking 472% over the past twelve months, making it one of the few traditional stocks to outperform bitcoin’s 337% gain over the same piece.
The Wall Street Journal noted that Tesla took advantage of its turbulent investor base and its rise in the share price to strengthen its cash position, bringing its cash holdings to $ 19.4 billion at the end of last year. approximately $ 6.3 billion at the end of 2019.
This means that the current bitcoin grant represents about 8% of its cash holdings.
“Tesla’s purchase of bitcoin 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,” said Jerry Klein, managing director and partner of Treasury Partners. , based in New York, emailed MarketWatch.
“While Tesla shareholders are reacting positively to the news, it remains to be seen how shareholders would react if a fall in bitcoin’s price negatively affected Tesla’s future earnings,” Klein said. CFOs are willing to take risks in their overall business, but not with the cash on their balance sheet. “While bitcoin has risen in recent months, it has been very volatile over the past few years,” he said.
To be sure, Tesla is not the first company, and probably not the last, to allocate a portion of the shares to bitcoin. Software Company MicroStrategy Inc. MSTR,
acquired a bit of bitcoin last year and was a proponent of other businesses.
MicroStrategy, which recently hosted a virtual conference on the usefulness of bitcoin for companies, estimates that bitcoin bitcoin is owned approximately $ 50 billion by private and publicly traded companies, citing data from BitcoinTreasuries.org.
MicroStrategy reports that approximately 8,200 people attended the weekend conference of nearly 7,000 companies.
Back at Tesla, Joe Osha, an analyst at TMP at JMP Securities, said in a telephone interview with MarketWatch on Monday afternoon that the electric vehicle manufacturer often experiences cash management issues, but believes it is a false assessment.
“I think there is this very old story around Tesla’s liquidity that is no longer consistent around its balance sheet or its cash flow,” Osha said.
He argues that investing in bitcoin is insignificant compared to the ability to generate cash, and joins the company’s strategy of being a disruption.
“I see this as another step in Tesla’s attempt to rediscover how cars are sold and delivered to people,” said Osha, referring to Tesla’s direct-to-customer sales model. Osha estimates that Tesla generated approximately $ 1.868 billion in free cash flow in the December quarter.
Chester Spatt, professor at the Carpet School of Business, Carnegie Mellon University, told MarketWatch that the volatility of bitcoin makes it a difficult asset to serve as a reserve asset for corporations or a medium of exchange.
“You have volatility here, which is about ten times that of the euro,” said the professor, who served as economist and director of the Security Office’s Economic Analysis Office from 2004 to 2007.
‘This move poses a major challenge for a business [bitcoin] on their balance sheet, but it also poses challenges for the consumer, ”he said.
Shares in Tesla closed 1.3% on Monday.
Antoni Trenchev, co-founder and managing partner of Nexo, a crypto lender, said it could make sense for companies to put some of their “dry powder” in bitcoin, especially with interest rates close to 0% and the US dollar. , as measured by the ICE US Dollar Index DXY,
FactSet data shows by almost 8% over the past year.
“Corporations with ever-increasing dry powder have a very obvious option for cash management: partial BTC allocation,” Trenchev told MarketWatch.
‘Sitting on heaps of cash yields little or no return and is devalued by the excessive QE measures of the central banks. “Having a treasury policy that diversifies risks and returns, as well as ‘the fastest horse’, is not only a good policy, but is also the policy that adheres to the most important principle of maximum shareholder value, ” he said.