After electric-car maker company Tesla, which is valued at over 700 billion dollars, has recently reported that it has invested 1.5 billion dollars in Bitcoin and expects to start accepting the cryptocurrency as a payment for its electric vehicles, the Bitcoin’s price skyrocketed. Till February 2021 the price is now up by over 50%. Other firms have also invested in Bitcoin including Square and MicroStrategy, which made 50 million and 1.3 billion dollars investment respectively.
Possible Implications
Tesla’s move has been the subject of much criticism as it may lead to both positive and negative results and some of them will be analyzed below.
To begin with, as Bitcoin and other cryptocurrencies become more valuable in terms of price per coin, and are used more frequently, the potential for hacks, breaches and theft will invariably rise. That means that great importance should be given to cybersecurity and safeguarding of information. Hacking and technological glitches could pose a problem for Tesla’s Bitcoin holdings and their nature as intangible assets may result in the loss or destruction of private keys needed to access such assets.
What is more, fund managers may not want to invest in a business with a risk on its balance sheet. Because Bitcoin is very volatile Tesla is starting to take on big FX risk. FX risk (Foreign exchange risk or currency risk) is a financial risk that exists when a financial transaction is denominated in a currency other than the domestic currency of the company. This could damage its climate bona fides and its reputation with customers.
Another implication of the purchase of large amounts of Bitcoin by Tesla is that it has led to speculation over inflammation, which can reduce the wealth of many people. Also, it could reduce the wealth of nations that hold reserves in USD (United States Dollars).
Moreover, cryptocurrencies are not considered currencies by many analysts. They are not a stable store of value, not a viable medium of exchange, nor a useful unit of account, which are the three classic functions of a currency. Their lack of physical form and their reliance on technology for their creation, existence and validation may subject their integrity to the danger of malicious attacks.
Bitcoin is a formula, an algorithm and Tesla’s decision to invest billions of its cash holdings means it is now exposed to an asset that does fluctuate wildly in value. It will, further, create variable pricing from sales, with the sales revenue from each vehicle depending on the price of Bitcoin on the day of settlement. Tesla’s move is controversial as Musk took the company’s funds rather than personal ones so the shareholder base has become much more diversified.
On the other side, Tesla’s move is a mega move because it gives backing to Bitcoin and it helps Bitcoin’s prospects in multiple time frames. The long-term aspirations of what Bitcoin is trying to accomplish are important and help loosen the hold of the money supply away from just central banks. This gives the opportunity for individuals to invest in something that isn’t necessarily inflationary. By investing in Bitcoin Tesla could maximize return on its cash. Musk probably doesn’t want only to maximize investment in the short-term but also to help humanity in the long term.
Musk sees Bitcoin going forward marching and may want to support it in his mission that is the decentralization of empowering of the masses. Tesla may stake its reputation by helping Bitcoin early at a crucial transition point, but the future benefit could outweigh the short-term risks or the scrutiny and the criticism that it would get.
Another positive outcome could be widespread corporate adoption. Companies will likely invest in Bitcoin over the next years as more regulation and acceptance of the cryptocurrency will possibly be established. Crypto traders and investors are seeing this move as a huge step in favour of institutional adoption of Bitcoin.
To summarize, cryptocurrencies are the most valuable investment of the decade. The high volatile nature of digital assets makes the investment in them a matter of great concern. Elon Musk’s initiative on backing up Bitcoin brings undoubtedly a significant change in the way we will do financial transactions. Let’s hope that in the near future the results of this move prove beneficial not only for those directly involved but also for humanity in general.
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