When Tesla’s annual report was released on Monday, it stated that the firm had bought $1.5 billion in bitcoin and that it wants to expand this position. This seems a strange move for an electric car producer, but Elon Musk regularly tweets about bitcoin and the digital currency dogecoin.
The $1.5 billion is less than one tenth of the total cash position of 19.4 billion dollars at the end of the fourth quarter and much less than 1% of the company’s market capitalisation of $813 billion. However, that cash position is not the result of the company’s operations, but the result of a share issue at the end of last year. So it’s free money. At the same time, $1.5 billion is more than twice Tesla’s total annual profit in 2020.
Moreover, the year 2020 was the first year that Tesla made a profit, so the company’s investment in bitcoin exceeds the total profit Tesla has ever made. Th is $1.5 billion is also equal to the R&D budget for 2020. Of course, bitcoin rose on the news, even above $43,000, and with that it also has a market capitalisation of over $800 billion, almost as big as Tesla, which wants to allow its customers to pay for their cars in bitcoin. The firm has plans to extend its bitcoin position further.
Many companies hold large cash positions. According to Tesla, its step makes it possible to increase returns on its cash reserves. The extremely low and even negative interest rates cause more people to do crazy things. Elon Musk may be an oddball, but for many CEOs Musk does set an example. Earlier this year, payment company Square bought $50 million worth of bitcoin. Several companies will probably follow Tesla’s example.
Yet Tesla’s move also raises governance issues. Can Elon Musk decide this on his own? Moreover, it is highly unusual for a CEO to first indicate on Twitter using the hashtag #bitcoin what the company is going to buy next. This is not the first time Musk has been called to account over his tweets. Furthermore, the purchase of bitcoin overshadows the bad news about the many recalls and the questions and complaints from China about the quality and safety of Tesla cars. Mind you, it’s the Chinese complaining about the safety of Western cars!
If Tesla bought the bitcoins at the January average, then by Monday it had made about 220 million dollars in profit. On the basis of a sharply higher share price, Tesla is taking money out of the market and by investing it in bitcoin is creating more money. Stuff of an Argentinian central banker’s dreams.
Moreover, Musk’s tweets are excellent at moving markets. In January, Musk said he liked the online shopping site Etsy because he had bought a cap for his dog there. The stock immediately opened 8% higher. Last year, Musk tweeted that Tesla’s shares were too expensive and, of course, the price fell on that message.
By the way, speculating car producers are no new thing. About a century ago, General Motors founder Durant speculated with the company’s money. Durant was a gambler and a speculator on the stock market. At one point, Durant had a position of almost $1 billion in shares, but he lost it all in the crash of October 1929. It was not the last time GM had to be rescued.
After the Great Financial Crisis, all American car companies had to be bailed out by the government. If the price of bitcoin drops now, Tesla may also get a bailout. Soon the Fed will be buying bitcoin to make sure not too many American companies fall over. Welcome to a strange new world.