After Announced Tesla it has invested $ 1.5 billion in bitcoin BTC and expecting to start accepting the cryptocurrency as a payment for its electric vehicles in the near future, the bitcoin price became soaring. It went from about US $ 39,400 to a full-time high of over US $ 48,000 in less than 24 hours.
That the price is now increased by over 50% in the first six weeks of 2021. Led by Elon Musk, Tesla’s investment is obviously already in profit: depending on the exact date of purchase, it’s probably worth more than $ 2 billion, indicating a paper profit of over $ 500 million. dollars. To put it in context, when the electric carmaker made its first ever annual net profit by 2020, it was just over $ 700 million.
Tesla’s transition to bitcoin comes on the back of a wave of institutional money invested in the leading cryptocurrency in recent months plus many other companies that have put it in their own reserves. With the world sixth most valuable company also says that it may buy and hold other digital assets “from time to time or long term”, it may be tempting for other larger companies to do the same. Since the Tesla announcement, Twitter CFO Ned Segal has already signaled that his firm is considering such a move, while a research note from the Royal Bank of Canada has explained why it will benefit Apple.
The prospect of a bluechip invasion in bitcoin has created great excitement among cryptocurrency investors. But if Tesla triggers such a gold rush, there will also be some disturbing consequences.
Release of volatility
Tesla justified this significant change in the way it manages its own reserves, saying that investing in bitcoin “will give us greater flexibility to further diversify and maximize the return on our cash”. Corporate cashiers have always used the money markets to invest excess cash to smooth out small returns, and this is more difficult than it was in the current long-term environment of low interest rates.
Yet this is very different from standard money management. Bitcoin is a very volatile asset that you typically do not associate with the cash reserves on the balance sheet of a listed company worth nearly one trillion US dollars. As recently as March 2020, the price fell below US $ 4,000. Even in 2021, the price fell more than 30% before the most recent increase.
Tesla has put almost 8% of its reserves in the cryptocurrency. If Apple, Microsoft, Facebook, Twitterand Google should do the same, it would translate into almost another $ 7 billion investment. This is less than 1% of the total present value of the bitcoin market, but the signal that it would send to other companies and retail investors would likely trigger a bull run that would make the current market look comparatively stable. Some cryptanalysts are already predicting that the price will rise to US $ 100,000 or even $ 200,000 before 2021 is out.
Such an increase would increase the value of bitcoin on corporate balances to several times what it was at the time of investment. Tesla’s allocation of 8% can e.g. Already increased up to 12% of the value of its reserves. And if it follows a potential plan to keep any bitcoins it receives for electric cars instead of converting them to dollars, that percentage could rise faster.
The problem is the potential effect on the company’s stock prices. Tesla stock price step 2% on the news of the bitcoin investment, although it has since fallen by 5%. But a long-standing example is the Canadian technology company Microstrategy. Its stock price has ballooned ten times in value in the past year on the back of a heavy investment in bitcoin, but has also fallen by almost a quarter in the days since the Tesla announcement.
Written big, this could make the stock markets far more choppier in the future – and vulnerable to a nosebleed when the bitcoin bull market ends. It would be easy to imagine that this could lead to a wider wave of sales as investors sought to cover their loss positions, which could be very dangerous for financial stability.
What the regulators will do
Global regulators will no doubt be concerned about a potential fluctuation in volatility from digital asset prices to traditional capital markets. They may not allow what can quickly mean effective proxy approval from the back door for companies that have large proportions of an unstable asset on their balance sheet.
The views of the US regulator SEC will be extremely important and it is difficult to predict the response of the newly appointed leader Gary Gensler, who himself is a crypto expert. We may see everything from a wait-and-see approach to a ban on listed companies that have bitcoin-like assets.
But I expect that if the price of bitcoin continues towards US $ 100,000, there may be a regulatory limitation on the reserve percentage that listed companies can have in digital assets. This corresponds to The United States controls it Companies cannot buy back more than 25% of the average daily volume of their own stock. Such a rule would force companies to sell bitcoin if a price increase meant that their holdings broke the maximum level, creating a kind of selling pressure that the crypto market has not seen before.
For now, though, bitcoin still looks like a “buy” act on the back of the Tesla announcement. The crypto environment will look at whether other big companies are following suit and whether Tesla has the conviction to stay invested when the next quarterly announcement comes around. But if this trend continues, make no mistake that a bill will come across the prospect of the eerie volatility of the crypto market going mainstream. See this room.
Published February 15, 2021 – 13:10 UTC
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