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Tesla risks becoming inextricably linked to Bitcoin's fortunes

James Titcomb
·3-min read
A Tesla Model S electric automobile stands on display - Jasper Juinen /FRANCE TESLA 
A Tesla Model S electric automobile stands on display - Jasper Juinen /FRANCE TESLA

Tesla’s disclosure this month that it was putting an unprecedented $1.5bn of its cash into Bitcoin drew several raised eyebrows, but in the short term, it had appeared to have paid off.

After the cryptocurrency hit a record high above $58,000 this weekend, Tesla was estimated to have made a $1bn profit in little more than a month. It is a bigger surplus than Tesla has ever realised from selling electric vehicles, and appeared to have won over the doubters who argued that Elon Musk was being risky with his investors’ cash.

But a rapid drop in Bitcoin’s price on Monday showed the downside of the bet. The cryptocurrency fell as much as 10pc, at one point dipping below the $50,000 mark before a slight recovery.

Musk himself was seen as somewhat responsible, having tweeted over the weekend that the price “seems high”, while US Treasury Secretary Janet Yellen criticised Bitcoin as inefficient and speculative.

Tesla’s share price plummeted too, dropping 8.6pc in the worst day for the company since last September, when a presentation about its battery work had left investors disappointed. As a result, Musk lost his status as the world’s richest man to Jeff Bezos, according to Bloomberg’s Billionaires Index.

Monday’s sell-off came alongside a wider drop in riskier tech shares amid rising US bond yields, and after Tesla abruptly stopped selling the cheapest version of its Model Y vehicle. But analysts also linked it to the Bitcoin slump, querying whether Tesla’s market fortunes had become linked with those of the volatile digital coin.

Tesla’s estimated $2.5bn in Bitcoin is a microscopic portion of its $685bn market value. However, the $1bn increase in its cryptocurrency holdings in the last few weeks alone dwarfs the $721m profit the company made in all of 2020.

The car company and the cryptocurrency share other characteristics. Both are popular among amateur investors enthusiastic about the future, and who may look to Bitcoin's non-stop price movements in the gap between Tesla's quarterly financial updates.

Both are also sources of returns for investors hit by low interest rates and bond yields. And since Tesla has declared its intention to accept Bitcoin as a form of payment, any drop in the latter’s value could affect the former’s sales.

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“With Tesla diving into the deep end of the pool on Bitcoin, Musk runs the risk that this sideshow can overshadow the fundamental electric vehicle vision in the near term for investors,” says Daniel Ives, an analyst at Wedbush Securities, who says he believes Tesla will hit a $1 trillion value this year.

“Bitcoin is the smart move at the right time for Tesla in our opinion, but on the downside it is playing with firecrackers. Musk is now tied to the Bitcoin story.”

Musk has attempted to downplay the significance of Tesla’s Bitcoin bet. Last week he called it “simply a less dumb form of liquidity than cash”, adding: “When fiat currency has negative real interest, only a fool wouldn’t look elsewhere.”

If Tesla continues to look elsewhere for places to put its cash, more investments in Bitcoin could further tie the company to the cryptocurrency’s future. Musk could resist that, however. After almost two decades seeking to make his company a beacon of the renewable energy movement, he may be wary of becoming a cryptocurrency cheerleader.