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Friday, February 26, 2021

Explained: Why has Tesla invested in bitcoin?

While Tesla’s may be the biggest investment in bitcoin by a consumer facing company, it is noteworthy that it does not hold the largest quantity of bitcoin for a single entity’s corporate treasury.

Written by Pranav Mukul , Edited by Explained Desk | New Delhi |
Updated: February 15, 2021 9:15:50 pm
At ATM in Hong Kong displays the Bitcoin logo. Tesla says it has invested more than $1 billion in Bitcoin and will accept the digital currency as payment for its electric vehicles. In a regulatory filing Monday. (File/AP Photo)

Electric car maker Tesla announced Monday that it invested $1.5 billion in bitcoin, making it the biggest investment by a mainstream corporation into the most popular cryptocurrency. In addition, the company also noted in a filing with the US Securities and Exchange Commission (SEC) that going ahead, it plans to start accepting the digital currency as a payment option for its products. Soon after Tesla’s announcement, the rate of bitcoin skyrocketed to an all-time high, breaching the $44,000-mark for the first time.

Why has Tesla invested in bitcoin?

In its SEC filing, the company pointed out that last month it updated its investment policy to be more flexible in further diversifying and maximising returns on its idle cash.

As a part of this plan, it said it would invest in certain “alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds” and other assets. “Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt,” it said.

In its earnings report for the fourth quarter released last month, Tesla said it had cash and cash equivalents of $19.4 billion.

What investment opportunity does bitcoin present?

The first advocates of bitcoin did not intend for it to be used as an asset, but with the mushrooming of exchanges where it could be easily purchased and sold, the currency became one. While not with the same approach, traditional investment experts have also cautioned against Bitcoin as an investment. Market participants say that the huge volatility in the price of bitcoin without any major fundamental reason is a factor that retail investors should be cautious about.

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What does Tesla’s investment in bitcoin mean?

To begin with, crypto traders and investors are seeing the investment as a huge step in favour of institutional adoption of bitcoin. “It’s a sign to other companies that bitcoin is a solid reserve asset for any balance sheet,” said Rahul Pagidipati, CEO of Indian crypto-exchange ZebPay. Tesla’s investment though is also a testament to its CEO Elon Musk’s support to cryptocurrencies including bitcoin, the price of which went surging after he changed his Twitter bio to read “#bitcoin”.

The announcement of Tesla investing in bitcoin has even raised red-flags about Musk’s social media activity on cryptocurrencies. “The moves raised immediate questions around CEO Elon Musk’s behavior on Twitter recent weeks, where he has been credited for increasing the prices of cryptocurrencies like bitcoin and dogecoin by posting positive messages that have encouraged more people to buy the digital currencies,” CNBC reported.

Are other corporations investing in bitcoin or accepting cryptocurrencies as a payment option?

While Tesla’s may be the biggest investment in bitcoin by a consumer facing company, it is noteworthy that it does not hold the largest quantity of bitcoin for a single entity’s corporate treasury.

Virginia, US-based business intelligence and mobile software company MicroStrategy has around 71,079 bitcoins in its holdings, compared to Tesla’s 43,053 bitcoins, while US-based financial services tech firm Square holds 4,709 bitcoins.

Among the major firms to accept bitcoin as payments are Microsoft, telecommunications giant AT&T, in addition to other companies like Pizza Hut, Subway, which accept bitcoin as payments in some of their branches in the US and Venezuela. Notably, AT&T was the first major US company to provide cryptocurrency payment option to its customers.

How risky is investment in bitcoin?

According to Tesla’s own admission in its SEC filing, the prices of digital assets have been in the past and may continue to be highly volatile, including as a result of various associated risks and uncertainties. “For example, the prevalence of such assets is a relatively recent trend, and their long-term adoption by investors, consumers and businesses is unpredictable.

Moreover, their lack of a physical form, their reliance on technology for their creation, existence and transactional validation and their decentralization may subject their integrity to the threat of malicious attacks and technological obsolescence,” it said.

Finally, the extent to which securities laws or other regulations apply or may apply in the future to such assets is unclear and may change in the future. “If we hold digital assets and their values decrease relative to our purchase prices, our financial condition may be harmed,” Tesla disclaimed.

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