Tesla’s tryst with Bitcoin: the picture, the issues and the way forward
Decoding the impact of Tesla’s investment in Bitcoin
Elon Musk, added Bitcoin as part of his portfolio on Twitter in March and the cryptocurrency’s value rose by about 15% in just minutes. In the same month, he announced that Tesla will let customers buy its cars in Bitcoin. The company had revealed in February that it has £1.1 billion invested in this digital currency.
The charged debate of carbon emissions:
Critics claim that these announcements bring forth the hypocrisy of Tesla and its CEO, who envision ambitious low-carbon future for the planet.
Ben Dear, CEO of sustainable investment firm Osmosis Investment Management, managing billions in assets in Tesla stocks, “If you want to drive down carbon emissions by 50% by 2030 and you facilitate payment for goods and services in Bitcoin, it is very contradictory.”
In Cambridge University’s study, it was found that cryptocurrency mining consumes more energy than Netherlands did in 2019; 0.5% of total global electricity consumption. Digiconomist claims that Bitcoin’s carbon footprint is comparable to that of New Zealand.
In the Independent, Charles Hoskinson — CEO of cryptography firm IOHK says, “Bitcoin’s energy consumption has more than quadrupled since the beginning of its last peak in 2017 and it is set to get worse because energy inefficiency is built into bitcoin’s DNA”
Resolving issues: the green debate
Ben Dear pointed out that Tesla doesn’t release its waste figures: “But, there’s more investor pressure now. The EU announced that European companies have to disclose carbon footprint. The SEC and the Biden administration are making similar noises.”
Some claim that energy-use itself is not a problem, carbon emission is. “Bitcoin can be powered by renewable energy. But it is meant to be decentralised and renewables-use means centralized servers. So, the country with the power source will then control regulatory landscape,” said Ben.
Currently, about 28% Bitcoin’s mining energy comes from renewables, notes University of Cambridge in its analysis. This shows scope for improvement. With its stock tied to Bitcoin, Tesla might want to consider investing in renewables. Ben Dear said, “I don’t see the culture at the top being cognizant of the contrary position taken but that might change.”
The volatility issues of stock prices:
Credit: NASDAQ:TSLA
Tesla’s stock prices show a fall since a day after it announced its ownership of Bitcoin. the last two weeks of February, Bitcoin fell by 20%, so did Tesla’s share prices. Wedbush’s Dan Ives told CNBC in February that the presence of bitcoin in the balance sheet adds to the volatility of Tesla’s share price.
Ben Dear said that the correlation between the two prices might be strong when there’s large movement in Bitcoin price. However, sometimes when price movement is not significant, Tesla does fine because hope of better future performance shows possibility of profitability.
A financial expert said: “Tesla share price has rallied over recent weeks — as has bitcoin, some of which is no doubt due to a correlation between the two. But there is also a strong tech tally driven by FED / inflation assumptions, etc. — tesla will be sitting on a larger paper profit from bitcoin investment than from day-to-day operations.”
Is Bitcoin a fad for Tesla and other corporates?
Dan Ives told CNBC in February that Tesla might double down on Bitcoin investment because it is are not just doing it from an investment perspective but also from a transaction perspective. About 3–5% of public companies might take this up, making it mainstream.
He said that Tesla gained about a billion dollars from Bitcoin invetsment and that means that the company will go to its deep ends. The amount is more than what Tesla earned in profits from EV (electric vehicle) sales in 2020.
What can happen if Bitcoin prices fall, or Tesla sells its stake?
“Is Bitcoin a store of value or the world’s largest Ponzi scheme, debates are ongoing,” says Ben.
He says that volatility in bitcoin is huge. It can be noted that from 19th April 2021 to 24th April 2021, Bitcoin price fell by 13.8%. That means if 100 pounds worth of this product, you’re now sitting on 86.2 pounds worth of FIAT currency.
He explains that Tesla made profits worth around 750 million pounds off its Bitcoin investment: “Is that a judicious use of cash on your balance sheet? Yes, while it’s up. But Bitcoin could go to $20,000. And then your investors will be worry about using cash on speculating in an unregulated market while also being responsible for huge carbon emissions.”
If Tesla sells its stake in Bitcoin: “It would send a signal to the market that it’s not going to the moon any longer. If we draw a Venn diagram between people that buy Tesla, who buy Bitcoin and who buy GME to the moon, at the centre will be a huge number of people. If you kill the face on one of the divisions, the diagram collapses,” notes Ben.
Considerations of using Bitcoin as payment:
If the government sees Bitcoin as a threat, the simplest way of dealing with it would be to increase capital gains tax. “Currently, you pay capital gains at 20% when you convert,” notes Ben Dear.
Additionally, payment is a one-way trade. Ben explains: “If you cancel your order, refund will be based on the price of bitcoin. I read that the mechanism Musk has is if price goes up, you get what you paid originally. And if the price goes down, you get that price’s cash equivalent. It’s clumsy financial engineering, possibly to profit further from Bitcoin movement.”
Tesla was reached out for comment, didn’t respond.
“Tesla has a cult following. Some groups who buy Tesla actually buy Musk. He has created significant value in everything he’s been involved. Whether the prices will be validated over longer term is to be seen,” notes Ben.
