Tesla’s powerful Bitcoin endorsement
Last Monday, Tesla’s annual report was released, and it stated that Tesla has bought USD 1.5 billion in bitcoin and that the company wants to expand this position. That seems a strange step for a producer of electric cars, but Elon Musk regularly tweets about bitcoin and the digital currency dogecoin. Incidentally, that 1.5 billion is less than one-tenth of the total cash position of 19.4 billion at the end of the fourth quarter and much less than 1 percent of the market capitalisation of now 813 billion dollars, yes. That cash position is not the result of the company’s operations, but the result of a share issue at the end of last year. Free money. At the same time, 1.5 billion dollars is more than twice Tesla’s total annual profit in 2020. Moreover, the year 2020 was the first year that Tesla made a profit, so more has been invested in bitcoin than the company has ever made in profit. That 1.5 billion is also equal to the R&D budget in 2020. Of course, bitcoin rose on this news, even to above $43,000, and with that, it also has a market capitalisation of over $800 billion, almost as big as Tesla. Tesla indicates that customers will soon be able to buy a car with bitcoin, apparently, 1.5 billion is not yet enough.
Many companies hold large cash positions. Tesla indicates that this step was taken in order to generate more return on liquidity. The extremely low and even negative interest rates cause more people to do crazy things. But Elon Musk may be an oddball, but for many CEOs, Musk does set an example. Earlier this year, payment company Square bought $50 million worth of bitcoin. Several companies will probably follow Tesla’s example. Yet Tesla’s move also raises governance issues. Can Elon Musk decide this on his own? Moreover, it is highly unusual for a CEO to first indicate on Twitter with #bitcoin what the company is going to buy next. This is not the first time Musk has been called to account for his tweets. Furthermore, the purchase of bitcoin overshadows the bad news about the many recalls and the questions and complaints from China about the quality and safety of Tesla cars. The Chinese complaining about the safety of Western cars.
If Tesla bought the bitcoins at the average price in January, then on Monday it made about 220 million dollars on the increased bitcoin price. It is what it is. On the basis of a sharply increased share price, Tesla is taking money out of the market, and investing it in bitcoin is creating more money. An Argentine central banker dreams of this. Furthermore, Musk’s tweets are excellent at getting markets moving. In January, Musk said he liked the online shopping site Etsy because he had bought a cap for his dog there. The stock immediately opened 8 percent higher. Ditto with CD Projekt shares, which rose more than 15 percent. Last year, Musk tweeted that Tesla shares were too high and, of course, the price fell on that message. By the way, speculating car producers are not new. About a century ago, General Motors founder Durant speculated with the company’s money. Durant was a gambler and a speculator on the stock market. In the end, Durant had a position of almost 1 billion in shares, but he lost it all in the crash of October 1929. It was not the last time GM had to be rescued. After the Great Financial Crisis, all American car companies had to be bailed out by the government. If the price of bitcoin drops now, Tesla may also get a bailout. Soon the Fed will be buying bitcoin to make sure not too many American companies fall over. A strange new world.