On February 8, 2021, Tesla CEO Elon Musk shocked many people when he announced the purchase of $1.5 billion worth of bitcoin. Also, the company expects to begin accepting payment in the cryptocurrency for its products in the future. Why would Tesla take such a risk investing into bitcoin? Before we answer this, let us take a step back to understand what bitcoin is. Bitcoin was created in January 2009 and is currently the world’s largest cryptocurrency by market capitalization. It is produced, distributed, traded, and stored with the use of a decentralized ledger system, known as a blockchain. Unlike government issued currencies, bitcoin does not rely on any central authority like a central bank or government to oversee its regulation.
In the past 52 weeks, bitcoin has grown roughly 1000%, reaching a high of $48,598, as of February 11, 2021. If profitable, this could be a quick way for the automaker to pull in more cash for research and development. At the same time, how can one be sure it will pay off? Bitcoin has proven insane growth, but it has certainly had its failures. If the popular cryptocurrency decides to plunge, like it has in the past, this immense investment could very well blow up in Tesla’s face. Not only would this reduce the cash Tesla has on hand to make purchases and acquisitions, but this could also wipe out its annual profit. In turn, a failed investment could negatively impact shareholder confidence in the emerging automaker. So far, Tesla has benefited from its investment, but if bitcoin collapses one day, this could negatively affect the company’s balance sheet.
Now, does it make sense to buy a Tesla using the often-volatile cryptocurrency? This ultimately depends on what happens with bitcoin’s price, which is nearly unpredictable. Bitcoin values fluctuate much more rapidly than most currencies. Not to mention Uncle Sam’s cut; whether you liquidate your bitcoin to spend on a Tesla or trade it in directly for a new Tesla, keep in mind the taxes to be paid on the amount your bitcoin has gained in value while you have owned it.
Lastly, I will touch on the irony of the whole endeavor. At current rates, bitcoin “mining” devours nearly the same amount of energy annually as the Netherlands did in 2019, according to the University of Cambridge and the International Energy Agency. “Mining” for the cryptocurrency is a tyrannical business, involving heavy computer calculations to verify transactions. With the rising price of bitcoin, there is even more incentive for Bitcoin miners to run more and more machines. In 2020, Tesla received $1.5 billion in environmental subsidies, funded by taxpayers. Tesla then turned around and spent $1.5 billion on Bitcoin, which is mostly mined with electricity from coal. Did this decision to invest so much capital into bitcoin undermine the company’s environmental image?
Only time will tell how smart this move was. Will this be the start of a new era? Has Elon Musk thrown away a lot of Tesla’s good work promoting energy transition? All we can do is wait and watch as the world changes before our eyes. We can already see a huge impact made by the rising cryptocurrencies and blockchain. While most of the world waits to see how such a move plays out, who will be next to take such a risk? What other big-name companies will follow in Tesla’s steps? If we learned anything from this past year, expect the unexpected.