Corporate Tax

Tesla’s Bitcoin wager is unlikely to have many imitators

Cryptocurrencies play almost no role in the stable world of corporate treasury, where protecting a company’s financial liquidity and cash reserves is of vital importance. It ruled out its massive volatility.

That didn’t stop Elon Musk, Tesla’s chief executive officer, from putting $ 1.5 billion of his company’s free cash into bitcoin last month. The company’s shares surged more than 1 percent on the news about the bet on Monday as Bitcoin price rallied sharply. For experts in the field of corporate treasury management, however, this step makes almost no sense.

“Companies invest their money in very high quality, short-term fixed income securities and are willing to accept relatively low returns,” said Jerry Klein, chief executive of Treasury Partners, a New York investment management firm. “I don’t think it makes sense to invest corporate money in a risky asset like Bitcoin that could see significant declines.”

Aside from a handful of publicly traded vehicles designed to give stock market investors the opportunity to speculate on cryptocurrency, very few companies have put their spare money into Bitcoin. One of the first was the Overstock ecommerce website – though it only contained $ 2 million in Bitcoin at the time of its last release.

The US software company MicroStrategy set the course in the middle of last year and took a timely step to shovel all the cash that is not needed for its operations into Bitcoin. A week ago, the company said it had spent a total of $ 1.145 billion on Bitcoin and was sitting on a hoard of digital currencies currently valued at $ 3.2 billion.

Michael Saylor, his CEO, described the investment as a “second strategy” for his company alongside the previous sale of software and not as a treasury decision. The company also said the investment was aimed at increasing brand awareness among information technology buyers and increasing software sales.

It’s unusual, risky, and doesn’t necessarily provide the coverage you’re looking for

For Tesla, with a market value of more than $ 800 billion, speculation about Bitcoin is unlikely to reach the level of a second strategy. However, accepting payments for electric cars in the form of bitcoin could polish the brand in the cryptocurrency universe. Musk’s support for Bitcoin and other digital currencies has already earned him a strong following in the crypto world. Tesla also said it would soon start accepting limited payments in Bitcoin, potentially offering more opportunities to tap into Musk’s crypto fan base.

Musk’s enthusiasm for Bitcoin may be positive in the longer term, but it carries more immediate risks.

One of them is the company’s reported profitability. Like MicroStrategy, Tesla said it would treat its crypto holdings as an intangible asset with long-term value like goodwill. Therefore, it must regularly re-evaluate its Bitcoin holdings and view any loss of value as a cost versus profit. An increase in value, on the other hand, cannot be returned to profit, but can only be realized if Tesla sells the stake in accordance with US accounting standards.

Tesla’s quarterly earnings swings are already heavily influenced by the amounts generated by selling regulatory loans to other companies, which detracts from the performance of the underlying auto business. A collapse in Bitcoin prices could add to the unnecessary movements in profits – although the downtrend would be limited to $ 1.5 billion if the company stopped pumping more money into the crypto markets. When filing with securities regulators, Tesla said his board had approved the purchase of gold and other digital assets.

“It’s unusual, risky, and not necessarily offering the coverage you’re looking for,” said Campbell Harvey, a professor at Duke University in Durham, North Carolina. “That’s fine with me if you’re a hedge fund and your clients know you’re doing just that, make speculative bets and sometimes they work and sometimes they don’t. . . Tesla is not a hedge fund. ”

The largest blue-chip companies have become full-time asset managers over the past decade as their cash holdings have increased and venture beyond time deposits and money market funds as parking spaces for their cash. However, their purchases have often centered on the quieter world of government bonds, corporate bonds, and asset-backed securities. Apple, which held nearly $ 200 billion in cash and stocks in December, invested 48 percent in corporate debt.

Bitcoin prices have risen sharply in the past 12 months. During the worst sell-off in March last year, prices fell 63 percent from highs reached a few weeks earlier. The cryptocurrency has since appreciated in value, up ten-fold from last year’s lows. On Wednesday it was quoted as high as $ 47,492.

David Yermack, a professor at New York University, said cryptocurrencies are so new that accounting and tax authorities don’t yet have rules on how companies should recognize the investments. He added that Tesla’s investment could lead to guidance on these fronts.

“It must be on everyone’s lips,” he said. “Many companies have avoided this for years because the auditors don’t know how to explain it.”

A large Bitcoin investment could also detract from Musk’s own stated intention of building a new style of corporate conglomerate dedicated to fighting climate change. The intensive data processing involved in Bitcoin mining – the process by which people involved in the network validate transactions – consumes a lot of energy.

Some crypto experts argue that it would be too easy for institutions dealing with environmental, social and governance issues or ESG investing to turn this against the company.

Ethan Buchman, co-founder of the Cosmos crypto project, said Tesla already had potentially greater ethical concerns about mining practices in extracting the materials used in car batteries. He also claimed that, if successful, cryptocurrencies like Bitcoin could lead to more moderate economic growth in the long run, with great benefits for sustainability.

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