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What Elon Musk's bitcoin bet means for Tesla: 5 things to know

More companies might follow suit, but the move also raises investor concerns

(Nikkei montage/AP)

PALO ALTO, U.S. -- The U.S. electric vehicle maker Tesla has bought $1.5 billion worth of bitcoins and said it would accept it as a form of payment for its cars in the near future -- adding to the buzz around both carmaker and cryptocurrency.

The announcement pushed bitcoin to an all-time high of above $48,000 on Tuesday morning -- which means it would only takes about 0.82 units of the cryptocurrency to buy an entry-level Tesla Model 3.

Here are five things to know about Tesla's bitcoin bet.

What exactly happened?

Tesla announced the $1.5 billion worth of bitcoin investment early Monday in a regulatory filing with the U.S. Securities and Exchange Commission (SEC) as part of its annual earnings report.

In the report, Tesla said its board approved an updated investment policy in January to provide "more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity." The company had $19.38 billion in cash and cash equivalents on hand as of the end of 2020.

Tesla said that subsequently it had invested $1.5 billion in bitcoin since January and might "acquire and hold digital assets from time to time or long-term." It might also invest in alternative reserve assets including gold and other digital assets, according to the filing.

Moreover, Tesla said it expects to "begin accepting bitcoin as a form of payment for our products in the near future", without specifying how crypto-based transactions will work. The company said the bitcoin payment will initially be on a limited basis, and the company may or may not liquidate the cryptocurrencies upon receipt.

In the filing Tesla warns that using bitcoin might pose risks to the company's financials as cryptocurrencies have been in the past and may continue to be "highly volatile".

The digital nature of bitcoin also made it subject to the threat of cybersecurity attacks or errors that may result in private keys needed to access the cryptocurrencies being lost or destroyed.

Why bitcoin?

Tesla CEO Elon Musk has been an outspoken supporter of cryptocurrencies including bitcoin. In January, the tech billionaire added the hashtag #bitcoin to his Twitter bio, which briefly pushed up the widely held cryptocurrency's price by as much as 20%. Musk later said via the audio-based social media app Clubhouse that he regretted moving the price. Two days later he regretted not investing in cryptocurrency sooner.

"Elon Musk is not conventional, and that's also why he's the richest person in the world, and how he's built Tesla and SpaceX to this point," said Dan Ives, managing director at Wedbush Securities. "It fits in the DNA of Musk and Tesla to make a move like this."

The investment in bitcoin is a "diversification strategy," which is bringing a decent return to the company, said Ives. The price of bitcoin has jumped nearly 67% this year since Jan. 1, indicating a lucrative return so far on the company's $1.5 billion investment.

Tesla is not the first company to add bitcoin to its balance sheet. MicroStrategy, a U.S. software company, bought $250 million worth of bitcoins in August, which are now valued at about $3.1 billion. The bet has helped to push the share price of the Nasdaq-listed company more than 800% higher.

"I think Musk has watched the MicroStrategy situation play out as that was a little test tube [before he made the move]," said Ives.

How are investors reacting to Tesla's bitcoin strategy?

Following the bitcoin announcement, Tesla shares were up 1.31% on Monday. But it does create some questions for investors, especially in how to manage the volatility of bitcoins.

"I think one of the big issues we'll see that many people had going into this was: Should I trade Tesla as a technology company? Should I treat Tesla as an automobile company?" TD Ameritrade Chief Strategist JJ Kinahan said in a TV interview on Monday.

The value of the digital currency has sometimes fallen sharply. Before bitcoin surged to a new record of $48,000 on Tuesday, the price of the cryptocurrency plunged from its high of nearly $20,000 in 2017 to under $5,000 in 2020.

"I think $1.5 billion is a contained, manageable amount relative to their balance sheet. However, if they double that amount, then I think it starts to raise issues for investors," said Ives. "Investors don't want to see it overshadow the underlying Tesla EV growth story."

However, the exposure to bitcoin might also make Tesla a more attractive investment.

"So many investors are trying to figure out a way to get access to the value of these assets, and crypto assets are not the easiest assets to handle," said Drew Hinkes, an attorney at law firm Carlton Fields who specializes in cryptocurrency and blockchain-related legal issues.

"For investors who may want to get access to the financial impact, whether it's positive or negative, [Tesla] may be an attractive way to get some exposure to the asset without directly purchasing it," he added.

Will the bitcoin bet face any regulatory headwinds?

Tesla said in its annual report that the bitcoin investment has been approved by the company board and the bitcoin payment in the near future will be "subject to applicable laws."

Accepting bitcoin as payment is expected to invite more regulatory scrutiny as governments are often wary of cryptocurrencies being used for money laundering or tax evasion.

"Bitcoin creates a very rich and detailed forensic trail of transactions," said Hinkes, adding that using bitcoin as a payment method might complicate the accounting process but does not mean avoiding taxes on crypto-based transactions.

Tesla might be under scrutiny by the Financial Crimes Enforcement Network, a branch under the Department of Treasury that regulates crypto exchanges, and the EV maker could also be required to report suspicious transactions to regulators.

Tesla is not the first company to accept bitcoin as a payment method. Tech giant Dell, furniture company Overstock, and travel site Expedia started accepting bitcoins years ago. The U.S. has established "sufficient legal infrastructure" to regulate bitcoin investment and transactions, provided that companies like Tesla "comply with all regulatory requirements and make all disclosures that are necessary," said Hinkes.

What does this mean for Tesla in Asia?

Tesla did not specify when it will roll out the bitcoin payment option, or in which countries buyers would be able to pay for cars in the cryptocurrency.

The EV maker has a big following in Asia -- particularly in China, a big part of its recent sales success. But Beijing prohibits trading and transactions of cryptocurrencies.

In Japan, an existing subsidy scheme of up to 400,000 yen for electric vehicles may incentivize Tesla buyers to stick with the national currency. Paying with bitcoin may make it more complicated for buyers to get the subsidy, which may rise to 800,000 yen in the next budget from April. The upcoming budget also includes new subsidies for home charging docks.

While some believe the announcement by Tesla will herald wider adoption of the cryptocurrency by the general public, for the time being it seems a niche option. "I think still less than 5% over the next two years would [pay for Tesla] in crypto. Over the next decade? Who knows," said Ives at Wedbush.

Additional reporting by Francesca Regalado in Tokyo

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