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Tesla’s big bitcoin bet could come back to bite the EV maker

Daniel Howley
·Technology Editor
·6 min read
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Wednesday, February 10, 2021

This article was first featured in Yahoo Finance Tech, a weekly newsletter highlighting our original content on the industry. Get it sent directly to your inbox every Wednesday by 4 p.m. ET. Subscribe

Tesla’s big bitcoin bet

Tesla’s (TSLA) revelation Monday that it bought $1.5 billion worth of bitcoin (BTC-USD) has already paid off for the electric vehicle maker, with its holdings growing by 35% as of Tuesday, according to a Yahoo Finance analysis. But the good times won’t last forever thanks to the cryptocurrency’s erratic swings.

“It's extremely unusual to see a company take risk with corporate cash,” Jerry Klein, managing director and partner at Treasury Partners, told Yahoo Finance. “Most companies have priorities of safety, followed by liquidity and yield being a distant third. So to see a company do anything outside of that framework is quite surprising.”

To give you an idea of how intense bitcoin’s price changes have been, look no further than its 52-week price range. On Feb. 8, 2020, the currency was trading at $4,106 a coin. On Tuesday, it was as high as $47,899. That’s a huge upswing in price, and a quick means for the automaker to pull in more cash for research and development and other expenses.

BERLIN, GERMANY DECEMBER 01:  SpaceX owner and Tesla CEO Elon Musk arrives on the red carpet for the Axel Springer Award 2020 on December 01, 2020 in Berlin, Germany.  (Photo by Hannibal Hanschke-Pool/Getty Images)
SpaceX owner and Tesla CEO Elon Musk arrives on the red carpet for the Axel Springer Award 2020 on December 01, 2020 in Berlin, Germany. (Photo by Hannibal Hanschke-Pool/Getty Images)

But bitcoin has collapsed before, meaning Tesla’s huge investment could backfire if the digital currency crashes. Such a move would not only reduce the cash Tesla has on hand to make purchases and acquisitions, but would also seriously hurt future earnings reports. That, in turn, could erode shareholder confidence in the high-tech automaker.

What’s more, Tesla isn’t just investing in bitcoin. It’s also expected to begin taking bitcoin payments for its products and services. In its SEC filing, the company said it would begin accepting bitcoin in the near future, noting that it “may or may not liquidate” the cryptocurrency after receiving it.

Bitcoin’s volatility isn’t always positive

A decline in bitcoin’s price would likely see shareholders begin to question Tesla’s thinking, Klein explained. Shareholders are generally more comfortable with risks to the companies conduct their business, but not so much how they invest their cash, he added.

“Today we're seeing Tesla shareholders respond favorably to the bitcoin news; however, it's unknown how they will respond if a decline in bitcoin’s value were to have caused the company to miss earnings estimates one quarter,” Klein said.

So far, Tesla has benefited from its bitcoin investment, but there’s no telling how long that will last. The cryptocurrency regularly sees large changes in value to the upside and downside, such as its collapse from roughly $20,000 to $3,000 between December 2017 and December 2018. That kind of loss could devastate Tesla’s balance sheet.

A Bitcoin digital currency ATM shop is seen in Marseille, France, February 7, 2021. REUTERS/Eric Gaillard
A Bitcoin digital currency ATM shop is seen in Marseille, France, February 7, 2021. REUTERS/Eric Gaillard

On top of hurting its balance sheet, Tesla’s bitcoin investment could leave it open to cyber attacks from hackers seeking to steal the company’s holdings. Hundreds of millions of dollars in cryptocurrencies were stolen throughout 2020 through various cyberattacks and scams. And while Tesla may have robust security procedures, it’s not invulnerable to such attacks.

Finally, there’s the diametrically opposed positions of running a company like Tesla, which is ostensibly meant to reduce carbon emissions by taking fossil fuel-powered vehicles off the road, and investing in a cryptocurrency like bitcoin, which requires massive amounts of energy to mine.

The total amount of electricity consumed in mining bitcoin each year exceeds the annual electricity consumption of Argentina and nearly as much as Norway, according to the University of Cambridge’s Judge Business School, which measures bitcoin energy usage on near-constant basis.

And as interest in bitcoin continues to grow, mining becomes more difficult for the computers tasked with the operation, consuming even more energy. That energy drain radically conflicts with Tesla’s mission to “accelerate the world’s transition to sustainable energy.”

What’s Tesla thinking?

So why did Tesla hop on the bitcoin train? Most companies invest in short-term, fixed income securities they can liquidate if they need cash for things like unforeseen charges, research and development, or acquisitions.

Of course, Tesla isn’t the only big-name firm to jump into bitcoin. PayPal allows users to buy, sell, and hold bitcoin, and Square purchased $50 million in bitcoin in October. CEO Elon Musk can send prices of cryptocurrencies soaring by merely mentioning them on Twitter, like when the joke-based cryptocurrency (DOGE), hit a record high after he and other big names mentioned it on Twitter.

There’s certainly an opportunity for Tesla to see its cash reserves grow as a result of the jump in bitcoin’s pricing — that extra dough could prove useful amid the automaker’s global expansion.

In Q4, Tesla reported free cash flow of $1.9 billion and cash and cash equivalents of $19.4 billion. And the company has been building that war chest to the tune of 209% year-over-year. Still, it has less cash on hand than automakers like, say, Ford (F), which ended the last quarter with nearly $31 billion in cash.

The purchase of $1.5 billion in bitcoin, which has increased in price from $9,856 to $47,899 in the last 12 months, could certainly help Tesla build up its reserves in relatively short order.

And as Yahoo Finance’s Jared Blikre pointed out, Tesla’s investment has already paid off, with the investment growing by $561 million as of Tuesday.

But as Wedbush analyst Dan Ives points out, Tesla investors shouldn’t get carried away with the current bitcoin hype, and instead continue to focus on its production of electric vehicles. “[W]e do not want the bitcoin mania to overshadow the underlying EV hyper growth story taking place at Tesla. Herein lies the fundamental driver of the stock’s value,” he said.

But what if bitcoin mania dies down? In that case, it could be hard for investors to ignore the EV maker’s decision to buy the unpredictable digital currency.

By Daniel Howley, tech editor. Follow him at @DanielHowley

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