• 10 February 2021
  • Treasury

Bitcoin and the Elon Musk Effect

Part 6 of a blog series on the rise of cryptocurrencies.

 

Bitcoin’s skyward surge received a rocket boost this week when Tesla revealed its purchase of $1.5bn worth of the currency. It also announced the business expected to start accepting currency for car sales in the near future.

Bitcoin has been on a spectacular bull run since the autumn and the vote of confidence from Elon Musk, the world’s richest man, has steepened the curve.

The move won’t have gone unnoticed among Group Treasurers around the world.

The impact was concisely noted in a tweet from Michael Saylor, CEO of MicroStrategy: “Tesla has de-risked the acquisition of #bitcoin by public companies and accelerated the digital transformation of corporate balance sheets. Treasurers are now thinking about how to convert a non-performing asset into the best performing asset.”

Saylor is one of Bitcoin’s leading cheerleaders and he has put his money where his mouth is. On December 21st 2020, MicroStrategy announced its total holdings included 70,470 bitcoins purchased for $1.125 billion at an average price of $15,964 per bitcoin. The value of this holding is now about three times higher.

Saylor was probably the least surprised by Tesla’s extraordinary move.  Musk and Saylor were exchanging tweets in December, and Saylor gave this advice: “If you want to do your shareholders a $100 billion favour convert the Tesla balance sheet from dollars to bitcoin. Other firms on the S&P 500 would follow your lead and in time it would grow to become a $1 trillion favor.”

Did Musk act on Saylor’s advice? Only he knows, but MicroStrategy will undoubtedly be content with the spike in the value of its bitcoin investment. And if Saylor is right, Tesla has just made a very lucrative bet.

Elon’s crypto love affair

If Saylor did influence Musk’s decision, he won’t have taken much persuading. It has been a subject that he has been tweeting about regularly - and his tweets have reverberated through the markets. On 29th January, the bitcoin price jumped solely on the fact that Musk had changed his twitter profile to #bitcoin”

His power over dogecoin has been even more spectacular, triggering a 50% leap in the currency’s value just through tweets, describing it as the “people’s crypto”.

Dogecoin was never supposed to be taken seriously. This was the view of one its two founders, Jackson Palmer, who walked away from dogecoin in 2015. He has repeatedly insisted that he intended dogecoin purely as a joke. In 2018, Palmer said, “I think it says a lot about the state of the cryptocurrency space in general that a currency with a dog on it which hasn’t released a software update in over 2 years has a $1B+ market cap.”

That was so 2018. At the start of February 2021, it is the 12th largest cryptocurrency, with a market cap of $6.1 billion. If it is a joke, it is best told by comedian-in-chief, Elon Musk.

A spark for Tesla?

Although Musk’s enthusiasm for crypto is well documented, an important distinction is that the huge investment into bitcoin has come not from Musk’s private fortune, but from Tesla.

Almost exactly a year ago, Musk stated in an interview with ARK Invest, a tech investment firm, that Tesla had not such intentions. He declared the company’s primary goal is to “accelerate the advent of sustainable energy,” noting that mining cryptocurrencies is computationally energy intensive. He concluded, “I’m not sure it would be a good use for Tesla resources to get involved in crypto.”

Why the change? In a statement to the US Securities and Exchange Commission, Tesla said the decision to invest in bitcoin was part of a broad investment policy aimed at “diversifying and maximising returns on our cash that is not required to maintain adequate operating liquidity”.

It is a sizeable gamble. The investment amounts to 10% of Tesla's cash reserves - and Musk only owns about 20% of the business. 

It is a fact that has not gone unnoticed among financial writers. Nils Pratley in the Guardian, posed the question: “If Elon Musk can’t resist the urge to speculate, shouldn’t he be using his own money rather than shareholders?”

He continues: “This adventure looks to be mostly about Musk’s taste for disruption and publicity. The winners are the promoters of bitcoin, who can say cryptocurrencies are reaching the mainstream of the financial system. But it’s not obvious what Tesla gets out of it, other than a small but still significant financial risk.

“The company should stick to what it’s good at – electric cars, energy-storing batteries and so on.”

It was only in December 2020 that Tesla announced that it was planning to raise $5 billion from Wall Street (added to $7 billion earlier in 2020). Most industry observers are expecting a significant increase in manufacturing capacity, and Musk has expressed ambitions to lower the entry level pricing for range of electric vehicles. Maybe more money is needed.

Perhaps the bitcoin investment is just a means to raise funds for Tesla’s inevitable expansion. 

Risky? With Tesla’s market capitalisation at more than $800 billion, making it the fifth most valuable company on Wall Street, it could be that its own bitcoin investment makes it a self-fulfilling prophecy.

Eric Turner, vice-president of market intelligence at cryptocurrency research firm Messari, commented: “I think we will see an acceleration of companies looking to allocate to Bitcoin now that Tesla has made the first move.”

Just like the old saying: money begets money!

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The rise of cryptocurrency - The blogs

1 - The mysterious birth of bitcoin

2 - Bitcoin - A beginners guide

3 - The dark side of bitcoin

4. Will the volatility ever end?

5. Can block chain technology make elections foolproof?

Guy Middleton is a Treasury Associate Director at Harvey John.

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