‘Playing with firecrackers’: Bitcoin’s price plunge shows risks for Tesla

Tesla’s disclosure this month that it was putting an unprecedented $US1.5 billion ($1.9 billion) of its cash into Bitcoin drew several raised eyebrows, but in the following days, it had appeared to have paid off.

After the cryptocurrency hit a record high above $US58,000 on the weekend, Tesla was estimated to have made a $US1 billion profit in little more than a month. It is a bigger profit 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 this week showed the downside. It has fallen by as much as 20 per cent since Sunday, at one point dipping below the $US45,000 mark before a slight recovery.

Tesla chief executive Elon Musk.
Tesla chief executive Elon Musk. Credit:AP

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

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Tesla’s share price plummeted too, dropping 8.6 per cent on Monday in the worst day for the company since last September, when a presentation about its battery work had left investors disappointed. Yesterday, they fell another 6 per cent. As a result, Musk lost his status as the world’s richest man to Jeff Bezos, according to Bloomberg’s Billionaires Index.

This week’s sell-off has come 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.

Tesla’s estimated Bitcoin holdings are a microscopic portion of its market value, which is above $US650 billion.

However, the $US1 billion increase in its cryptocurrency holdings in the last few weeks alone dwarfs the $US721 million 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 pay undue attention to Bitcoin’s non-stop price movements in the long gaps between Tesla’s quarterly financial updates.

Both are also sources of returns for investors hit by low interest rates and bond yields.

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.

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.

“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 $US1 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 it to the currency’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 crypto cheer-leader.

The Daily Telegraph, London

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