On Monday the 8th of February, Tesla Inc. announced it purchased $1.5 billion in bitcoin and will soon be accepting the cryptocurrency as a method of payments for its electric cars.
According to the company’s filing with the Securities and Exchange Commission (SEC), this payment method will be subjected to “applicable laws and initially on a limited basis.”
Tesla conducted the purchase after the Chief Executive Elon Musk promoted the use of Bitcoin and other digital currencies as substitutes on Twitter.
Elon Musk has always shown fascination in digital currencies and saw the potential that it entails. Mr. Musk said last week on the social networking app “Clubhouse” that: “I think bitcoin is really on the verge of getting broad acceptance by sort of the conventional finance people.” He also emphasized on the importance of being cautious about disclosing information regarding investments in cryptocurrencies because they are capable of “moving the market.”
Tesla stated that this step aims to “diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity.” Tesla’s board committee already approved of the new payment method and adhered to the changes in the company’s policies on investment. The company mentioned,it is open to investing its liquid assets into gold exchange traded funds and in gold bullion.
This purchase, by far, could be the largest one made by a public company in bitcoin. Tesla, alongside other companies, have disclosed their bitcoin purchases to the public. Nonetheless, the news flickered a heavy trading in cryptocurrencies which led to technical issues for other digital currencies according to Coindesk, the cryptocurrency research and news website stated . Some of which are Binance and Gemini.
Furthermore, many new companies are expected to invest in the currency as well, increasing the demand on cryptocurrencies, which by turn will increase their value. Bitcoin already witnessed a surplus in its value as soon as Tesla announced the investment.
The prices of the digital currency increased by more than 10% according to CoinDesk, hitting a new value of over $40,000. At this rate, 0.8 bitcoins could cover the price of a new Tesla Model 3.
Implications on Tesla
Tesla and other companies adding bitcoins in their treasuries are prone to an accounting risk. These risks are due to the fact that Bitcoin and many other cryptocurrencies, unlike hard currencies, are viewed as “intangible assets”; meaning that, any decrease in the currency’s value under the original price that the company purchased it could potentially make the investor company to take an impairment charge.
A case in point is Michael Saylor’s MicroStrategy which invested around $450 million in bitcoin last summer. The company ended up recording a net loss in September due to the drop in bitcoin’s value.
Tesla is aware of the setbacks that it could face due to the instability in cryptocurrencies stating that “If we hold digital assets and their values decrease relative to our purchase prices, our financial condition may be harmed.”
As a safety strategy, Tesla announced it will quarterly analyze its holdings in bitcoin. It is a high-risk high-reward investment strategy; the sharp changes in the value of the cryptocurrencies is what gave investors billions of dollars as profit.
Michel Rauchs, founder of Paradigma Sarl, a digital-assets consulting firm based in Luxembourg, stated: “It is definitely greater risk but greater reward there.”
So far, the cryptocurrency seems to be doing well in the market. According to CoinDesk, Bitcoin recently traded on Monday at $43,602. The currency averaged at a value of $34,730 in January which is more than eight times higher than bitcoin’s 2020 low of a little under $5,000.