Tesla’s Investing in Bitcoin Might Destabilize the Stock Market

Jan 14, 2022 at 11:42 // PR
Guest Author

The bitcoin price skyrocketed after Tesla stated it has invested US$1.5 billion in bitcoin and expected to begin accepting it as payment for its electric automobiles in the future. In less than 24 hours, it surged from roughly US$39,400 to almost US$48,000, an all-time high.

In the first six weeks of 2021, the price has risen by more than 50%. Tesla's investment, led by Elon Musk, is clearly profitable: depending on the exact day of acquisition, it is likely to be valued over US$2 billion, implying a profit of over US$500 million on paper. To put that in perspective, the electric carmaker's first annual net profit was little over US$700 million in 2020.

The price of bitcoin

Tesla's foray into bitcoin follows a slew of institutional money pouring into the main cryptocurrency in recent months, as well as a slew of other businesses putting it in their treasury reserves. With the world's sixth most valuable firm to sell bitcoin in Dubai indicating that it may acquire and hold other digital assets "from time to time or long term," other significant corporations must be tempted to follow suit. Since Tesla's announcement, Twitter finance director Ned Segal has said that his business is investigating it, and a research note from the Royal Bank of Canada has argued that it would be beneficial to Apple.

The potential of a bluechip incursion into bitcoin has piqued cryptocurrency investors' interest. However, if Tesla succeeds in starting a gold rush, there will be some troubling implications.

Spillover of volatility

Tesla claims that investing in bitcoin would "give us with greater freedom to further diversify and maximize returns on our capital," justifying this significant shift in the way it handles its treasury reserves. Corporate treasurers have traditionally utilized the money markets to invest excess cash to earn minor returns, but it's more difficult now than it used to be because of the present long-term low interest rate environment.

All the same, this is a completely different approach to money management than most people are used to. Bitcoin is a very volatile asset that you wouldn't normally link with the cash reserves on the balance sheet of a publicly traded firm with a market capitalization of over a trillion dollars.

Tesla has invested nearly 8% of its cash in the cryptocurrency. If Apple, Microsoft, Facebook, Twitter, and Google all did the same, the total investment would be about $7 billion. Although this represents less than 1% of the bitcoin market's current value, the signal it would convey to other firms and ordinary investors would almost certainly ignite a bull run, making the current market appear relatively steady. Before the end of 2021, some crypto specialists anticipate that the price will soar to $100,000 or even $200,000.

The issue here is the possible impact on stock prices. The revelation of the bitcoin investment boosted Tesla's stock price by 2%, but it has subsequently plummeted by 5%. Microstrategy, a Canadian IT firm, provides a longer-term example. Its stock has risen tenfold in value over the last year because of a large investment in bitcoin, but it has also fallen by over a quarter in the days after Tesla's announcement.

When the sell bitcoin in Dubai  market ends, this might make stock markets significantly choppier in the future and prone to a fall. It's simple to see how this may trigger a larger wave of selling as investors try to cover their losses, which could be extremely harmful for financial stability.

What will the regulators do?

Global authorities will undoubtedly be concerned about the possibility of digital asset price volatility spilling over into traditional capital markets. They may not allow what amounts to effective proxy approval through the back door for corporations with high amounts of a volatile asset on their balance sheets.

The SEC's perspective will be crucial, and it will be impossible to anticipate how newly appointed chairman Gary Gensler, who is himself a crypto specialist, would respond. We might see anything from a wait-and-see attitude to a complete prohibition on publicly traded corporations owning bitcoin-like assets.

However, in the wake of the Tesla news, bitcoin remains a "buy" asset for the time being. The crypto community will be waiting to see whether other large corporations follow Tesla's lead, and if Tesla has the conviction to stay invested until its next quarterly report is out. But, if this trend continues, there will be a reckoning over the likelihood of the crypto market's high volatility becoming commonplace. Keep an eye on this.

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