Electric car manufacturer Tesla recently announced that it had bought $1.5 billion Bitcoin. The company also revealed that it was looking to start taking payments for its vehicles in cryptocurrency in the short-term. Analysts seem to be split on whether other companies will copy Tesla’s investment in Bitcoin.
The move marked the first time a blue-chip business had acquired such a massive amount of cryptocurrency. The company’s decision to pursue a Bitcoin payment strategy is also a first in the blue-chip sphere.
Tesla stock and Elon Musk
The Bitcoin stock price moved extremely higher following the decision by Tesla and its founder Elon Musk. The billionaire investor has been a vocal supporter of cryptos. He has recently been touting Dogecoin on his Twitter feed.
This wouldn’t be the first time Elon Musk has pushed Tesla to meet his own personal goals. Several years ago, the company acquired his struggling solar panel business SolarCity.
At the time, Musk billed the deal as a revolutionary transaction making the world’s only sustainable integrated energy firm. However, critics questioned whether the move was designed to bail out SolarCity. The business had always struggled to earn a profit and convince users to buy its products in large numbers.
Nevertheless, Tesla isn’t the only blue-chip that recently expressed an interest in Bitcoin stock. The United States’ oldest bank, Bank of New York, as well as MasterCard and PayPal, have all recently announced that they will enable customers to use and store the cryptocurrency.
The question is, will this inspire other blue-chips to follow Tesla? Will more giants start using Bitcoin on a day-to-day basis, and eventually drag the cryptocurrency into the mainstream.
Will other companies buy into Bitcoin stock?
Analysts look to be split on whether other companies will copy Tesla’s investment in Bitcoin.
Bitcoin’s biggest drawback is its volatility. Big companies need to be able to trust that the amount of money in their bank account is going to be worth what they think it is. That’s why corporate treasurers stick with so-called risk-free assets to manage company funds. Assets like US Treasuries and money market instruments.
There’s no such guarantee with Bitcoin stock. Even Tesla itself has admitted as much. When the firm announced its cryptocurrency holding, it told the market that it would revalue the asset every quarter based on price momentums. This could work out well if the price of Bitcoin keeps increasing. If it starts dropping, Tesla may have to report significant losses.
This is the primary reason why most analysts believe other blue-chip stocks will not follow the electric car firm.
Yet, the company’s decision to start accepting Bitcoin as a method of payment for its vehicles may inspire other companies to start using Bitcoin, which could drive a virtuous cycle.
That’s what analysts at Wedbush think could happen over the next years. After Tesla revealed its investment in Bitcoin stock, the analysts said the firm’s decision was a sign of the broader digital currency and blockchain space growing.
“…We believe the trend of transactions, Bitcoin investments, and blockchain driven initiatives could surge over the coming years as this Bitcoin mania is not a fad in our opinion, but rather the start of a new age on the digital currency front,” said Wedbush.
The analysts added that Tesla’s move into Bitcoin could be a “paradigm changing move for the use of Bitcoin from a transaction perspective.”
All of the above looks to suggest that the analyst community is split on whether or not Tesla’s move into Bitcoin stock will see a slew of followers. Some firms may follow the business and build a large position in cryptocurrency and announce their intention to accept Bitcoin payments. Though, this is unlikely to be a universal move at this stage. Virtually all major transactions globally are completed in fiat money such as the US dollar, Euro and Pound Sterling. This is unlikely to change anytime soon.
Cryptocurrencies have started to gain traction over the last years, but they are still nowhere near widespread adoption. Tesla’s move may help accelerate adoption, but this won’t happen overnight. As long as governments all around the world continue to pay employees in fiat money and collect tax in fiat currency, the use of Bitcoin and its peers seems unlikely to become widespread.
Another unknown is what impact this move will have on Tesla and the Tesla stock price in the long-term.
Bitcoin stock volatility
As said above, the company will have to announce to investors if it suffers losses on these investments. Since it completed the deal, the price of BTC has been rising. As such, it doesn’t look as if the business will have to reveal losses anytime soon.
Yet, that does not guarantee that the company will be able to avoid writing down the value of its investment in Bitcoin stock for the life of the investment.
Any huge loss could have a big impact on investor sentiment towards that firm. After all, the $1.5 billion invested is technically shareholders’ money. Elon Musk has come under fire before for his lax approach to corporate governance and shareholders’ treatment. Suppose the value of Bitcoin were to drop, and it turned out that he had effectively gambled away $1.5 billion of shareholder funds. In that case, it might really damage his reputation and investor sentiment towards Tesla stock.
If the value of Bitcoin continues to rise, profits generated on the position could produce some much-needed income for the electric car maker, which has always struggled with profitability.
The overall effect of this trade appears to be that it has made the outlook for Tesla stock even harder to predict. The firm has taken over the electric vehicle market during the past few years, but it has always struggled to earn a profit on its operations.
So far, investors have been willing to give Elon Musk the benefit of the doubt. If the BTC trade works out, they may continue to do so. If not, the market may start to question his leadership.