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Will other blue-chips copy Tesla’s move into Bitcoin stock?

20 Feb 2021 | by: Scott Atkinson

Electric car manufacturer Tesla recently revealed that it had invested $1.5 billion in Bitcoin stock. The company also announced that it was looking to start taking payments for its vehicles in cryptocurrency in the near-term.

The move marked the first time a blue-chip business had acquired such a large amount of cryptocurrency. The company’s decision to pursue a Bitcoin payment strategy is also a first in the blue-chip space.

Tesla stock and Elon Musk

The Bitcoin stock price moved significantly higher following the decision by Tesla and its founder Elon Musk. The billionaire investor has been a vocal supporter of cryptocurrencies. He has recently been touting Dogecoin on his Twitter feed.

This wouldn’t be the first time Elon Musk has pushed Tesla to meet his own personal aims. Several years ago, the company acquired his struggling solar panel business SolarCity.

At the time, Musk billed the deal as a revolutionary transaction creating the world’s only sustainable integrated energy company. However, critics questioned whether the move was designed to bail out SolarCity. The business had always struggled to earn a profit and convince customers to buy its products in large numbers.

Nevertheless, Tesla isn’t the only blue-chip that recently expressed an interest in Bitcoin stock. The United States’ oldest bank, Bank of New York, as well as MasterCard and PayPal, have all recently announced that they will allow customers to use and store the cryptocurrency.

The question is, will this inspire other blue-chips to follow Tesla? Will more big companies start using Bitcoin on a day-to-day basis, and finally drag the cryptocurrency into the mainstream.

Will other companies buy into Bitcoin stock?

Analysts seem to be split on whether other companies will follow Tesla’s move.

Bitcoin’s biggest drawback is its volatility. Large companies need to be able to trust that the amount of money in their bank account is going to be worth what they think it is. That’s why corporate treasurers stick with so-called risk-free assets to manage company funds. Assets such as US Treasuries and money market instruments.

There’s no such guarantee with Bitcoin stock. Even Tesla itself has admitted as much. When the company announced its cryptocurrency holding, it told the market that it would revalue the asset every quarter based on price movements. This could work out well if the price of Bitcoin keeps rising. If it starts falling, Tesla may have to report significant losses.

bitcoin on top of dollar bills
Bitcoin and fiat currency | Source: Photo by Dmitry Demidko on Unsplash

This is the primary reason why most analysts believe other blue-chip stocks will not follow the electric car company.

Yet, the company’s decision to begin accepting Bitcoin as a method of payment for its vehicles may inspire other companies to start using Bitcoin, which could drive a virtuous cycle.

That’s what analysts at Wedbush think could happen over the next few years. After Tesla announced its investment in Bitcoin stock, the analysts said the firm’s decision was a sign of the broader digital currency and blockchain space growing.

“…We believe the trend of transactions, Bitcoin investments, and blockchain driven initiatives could surge over the coming years as this Bitcoin mania is not a fad in our opinion, but rather the start of a new age on the digital currency front,” said Wedbush.

The analysts went on to add that Tesla’s move into Bitcoin could be a “paradigm changing move for the use of Bitcoin from a transaction perspective.”

Split opinions

All of the above seems to suggest that the analyst community is split on whether or not Tesla’s move into Bitcoin stock will see a slew of followers. Some companies may follow the business and build a large position in cryptocurrency and announce their intention to accept Bitcoin payments. Though, this is unlikely to be a universal move at this stage. Virtually all major transactions worldwide are completed in fiat currencies such as the US dollar, Euro and Pound Sterling. This is unlikely to change anytime soon.

Cryptocurrencies have started to gain traction over the past decade, but they are still nowhere near widespread adoption. Tesla’s move may help accelerate adoption, but this won’t happen overnight. As long as governments worldwide continue to pay employees in fiat currency and collect tax in fiat currency, the use of Bitcoin and its peers seems unlikely to become widespread.

Another unknown is what impact this move will have on Tesla and the Tesla stock price in the long-term.

Bitcoin stock volatility

As noted above, the company will have to announce to investors if it suffers losses on these investments. Since it completed the deal, the price of Bitcoin has been increasing. As such, it doesn’t look as if the business will have to reveal losses anytime soon.

Yet, that does not guarantee that the company will be able to avoid writing down the value of its investment in Bitcoin stock for the life of the investment.

Any significant loss could have a big impact on investor sentiment towards that company. After all, the $1.5 billion invested is technically shareholders’ money. Elon Musk has come under fire before for his lax approach to corporate governance and shareholders’ treatment. Suppose the value of Bitcoin were to fall, and it turned out that he had effectively gambled away $1.5 billion of shareholder funds. In that case, it might significantly damage his reputation and investor sentiment towards Tesla stock.

If the value of Bitcoin continues to increase, profits generated on the position could produce some much-needed income for the electric car maker, which has always struggled with profitability.

The overall effect of this trade seems to be that it has made the outlook for Tesla stock even harder to predict. The company has taken over the electric vehicle market during the past few years, but it has always struggled to earn a profit on its operations.

So far, investors have been willing to give Elon Musk the benefit of the doubt. If the Bitcoin trade works out, they may continue to do so. If not, the market may start to question his leadership.

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  • Rupert Hargreaves does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.
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