The Tesla Investment is Important for Cryptocurrencies

Shares or Tesla (TSLA) and Bitcoin are both rallying on Monday after the electric automaker filed a 10K with the SEC disclosing that they had amassed a $1.5 billion USD worth of the cryptocurrency.

TSLA shares moved up between 1-2% on the news while Bitcoin gained almost 15% to a new all-time high of $44,116. Tesla also stated that they had plans to accept Bitcoin as payment for their products – and in many ways, that’s the more significant development.

As of the end of 2020, Tesla had about $20 billion in cash and equivalents on the balance sheet, so the Bitcoin purchase represents less than 10% of Tesla’s available cash reserves. Tesla’s cost basis for the purchase was not disclosed, but the company did enjoy gains of over $200 million on the position on Monday alone.

For reference, Tesla earned net profits of approximately $270 million in the 4th quarter of 2020.

While the news is a significant development for Tesla, it’s probably bigger news for Bitcoin and the cryptocurrency markets as a whole. Adoption as a transactional currency by a company as large and well-known as Tesla is likely to further the case for crypto as a legitimate medium of exchange.

Even more important will be the way Tesla prices its offerings. Until now, e-commerce sites that accepted Bitcoin as payment still priced their offerings in dollars (or other government-backed currencies) and made sales based on the immediate exchange rate. Because Bitcoin prices move thousands of dollars at a clip, its very difficult for companies who pay their expenses and measure results in dollars to hedge currency risk.

(Thanks to trillions in international trade and stable and predictable interest rate policies from central banks, currency pairs like USD/GBP or USD/CNY trade in enormous volumes and daily moves are generally measured in fractions of a cent.)

The “value” of any unit of currency is the amount of goods and services a holder can trade it for. If Tesla were to price automobiles in terms of Bitcoin – as well as dollars, Pounds, Euros or Yuan – it might have the effect of stabilizing the exchange rate of Bitcoin versus traditional currency. In a roundabout way, the move would make Tesla something of a de facto crypto exchange agent.

That stabilization effect would only grow if other manufacturers of big ticket durable goods followed suit and began to accept Bitcoin as payment.

Investors in most companies might not be pleased to see the CEO change course so rapidly instead of focusing on core businesses, but Musk gets a lot more latitude from Tesla shareholders – primarily because of his huge success at innovation in the past.

It remains to be seen whether his latest move has lasting impact on the crypto markets or is simply an interesting news item, but when Elon Musk is involved, you know almost anything is possible.

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