Tesla Inc. said Monday it bought $ 1.5 billion worth of bitcoin, a purchase that comes after CEO Elon Musk has been promoting the world’s No. 1 digital asset along with other cryptos in recent weeks.
Bitcoin’s price BTCUSD,
Already on a stratospheric rise, it garnered an extra boost from the announcement, with a single bitcoin switching hands on Monday at $ 42,709, up more than 9%. Prices hit a record high near $ 45,000
But one of the main questions revolving around the electric vehicle manufacturer’s decision is whether the move, including the decision to eventually sell its products in bitcoins, is a wise use of capital. It’s a question that’s especially important given the wild swings that both Tesla TSLA stocks have,
and bitcoin are prone to it, even if those assets have both been on an almost uninterrupted ride.
“I think this is a terrible strategy on many, many levels,” said Christopher Schwarz, associate professor of finance and faculty director of the Center for Investment and Wealth Management at the University of California at Irvine in an emailed response.
Basically this is like creating [currency] risk as none of Tesla’s suppliers are paid in bitcoin, ”Schwarz told MarketWatch.
An email to the company for comment was not immediately returned.
Musk’s moves come as Tesla focuses on ramping up electric vehicle production, with the stock price soaring, but the automaker is still a relatively niche player despite its market value of over $ 800 billion.
Tesla’s stock is up a whopping 472% in the last 12 months, making it one of the few traditional stocks to outperform bitcoin’s 337% gains over the same period,
The Wall Street Journal noted that Tesla has taken advantage of its rabid investor base and stock price increase to bolster its cash position, bringing its cash reserves to about $ 19.4 billion at the end of last year, from about $ 6.3 billion at the end of last year. 2019.
That means the current bitcoin allocation represents about 8% of its cash.
“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 to ensure liquidity and limit volatility,” Jerry Klein, CEO and partner at Treasury Partners, based in New York, MarketWatch told via email.
“While Tesla shareholders are responding positively to the news, it remains to be seen how shareholders would react if a drop in the price of bitcoin negatively impacted Tesla’s future earnings,” Klein said. “CFOs are willing to accept risk in their overall business, but not with the cash on their balance sheet. While bitcoin has skyrocketed in recent months, it has been very volatile in recent years, ”he said.
Certainly Tesla is not, and probably not the last, to distribute some of its holdings to bitcoin. Software company MicroStrategy Inc. MSTR,
acquired a bit of bitcoin last year and has been a champion of other companies in doing so.
MicroStrategy, which recently hosted a virtual conference on bitcoin’s usefulness to businesses, estimates that approximately $ 50 billion worth of bitcoin is owned by private and publicly traded companies, citing data from BitcoinTreasuries.org.
MicroStrategy reported that approximately 8,200 people attended the weekend conference of nearly 7,000 companies.
Back to Tesla, Joe Osha, a Tesla analyst at JMP Securities, told MarketWatch in a phone interview Monday afternoon that the electric vehicle manufacturer is often accused of cash management issues, but believes that is a false assessment.
“I think there is a very old story about Tesla’s liquidity that is no longer consistent with balance sheet or cash flow generation,” Osha said.
He argues that companies’ investments in bitcoin are trivial against the scale of its ability to generate cash, and is in line with the company’s strategy of being a disruptor.
“I see it as another step in Tesla’s attempt to reinvent the way cars are sold and delivered to people,” said Osha, referring to Tesla’s direct selling model. Osha estimates that Tesla generated approximately $ 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 corporate reserve or medium of exchange.
“You have a volatility here that is about ten times that of the euro,” said the professor, who was an economist and director of the Office of Economic Analysis at the Securities and Exchange Commission from 2004 to 2007.
“This movement presents a company with many challenges [bitcoin] on their balance sheet, but it also poses challenges from a consumer point of view, ”he said.
Tesla shares closed 1.3% on Monday.
Antoni Trenchev, co-founder and managing partner of Nexo, a crypto lender, said it may make sense for companies to put some of their “dry powder” into bitcoin, especially with interest rates approaching 0% and the US dollar under pressure. , as measured by the ICE US Dollar Index DXY,
That’s down nearly 8% in the past year, FactSet data shows.
“Companies with ever-expanding dry powder have one most obvious cash management option: partial BTC allocation,” Trenchev told MarketWatch.
“Sitting on stacks of money offers little or no return and is constantly devalued by the excessive QE measures of central banks. Having a treasury policy that diversifies risk and return and not only looks at ‘the fastest horse’ is not only a sound policy, but is also the one that most closely aligns with the key principle of maximizing shareholder value, ”he said .