Last Monday, Tesla Inc. revealed that it invested $1.5 billion worth in bitcoin. Tesla also announced its plan to “begin accepting bitcoin as a form of payment” for products in the future. According to the filing with the Securities and Exchange Commission, Tesla’s bitcoin investment intended to “diversify and maximize returns on [its] cash that is not required to maintain adequate operating liquidity.”
In recent weeks, bitcoin prices have surged, and Elon Musk’s outward support for bitcoin on Twitter seemingly boosted the price 20% higher. The price of bitcoin has increased almost 67% this year since January 1, indicating that the company’s investment may be on the path of lucrative return.
However, Musk’s decision raised many eyebrows. Cryptocurrencies are not cash or equivalents for accounting purposes, and are instead considered an intangible asset. The value of cryptocurrencies cannot be written up until they are sold. Conversely, they must be written down as an impairment loss if the price decreases. Tesla conceded that there is the risk that the values of the digital assets “decrease relative to [the] purchase prices,” which may harm their financial condition, given the “highly volatile” nature of digital assets.
Yet, the recent trend of investors betting on bitcoin has been supported by more than just Tesla. Companies like PayPal Holdings and Robinhood Markets Inc. have also decided to allow their customers to purchase and sell bitcoin. PayPal announced in early 2021 that it plans to expand options for buying or selling with bitcoin so that users may use bitcoin to purchase from any of the 28 million merchants on the platform. On Thursday, America’s oldest bank, the Bank of New York Mellon Corp., also joined the cryptocurrency market, adding to the increasingly popular trend of digital assets and cryptocurrency. Some investors find bitcoin attractive because of its decentralized system, which allows for transactions that are not controlled by any government or company.
Musk has asserted that he believes that bitcoin “is on the verge of getting broad acceptance by conventional finance people,” but this optimistic outlook stands in contrast with the skepticism of many other bankers and regulators. Currently, the U.S. has no rules for digital assets that are accepted by the generally accepted accounting principles (GAAP). In October, the Financing Account Standards Boards unanimously voted that it would not add cryptocurrencies to its standards. Some bankers have even pointed out issues regarding illicit bitcoin and cryptocurrency financing. Others have highlighted the potential environmental implications of cryptocurrency, which ironically works against Tesla’s environmental image and company values. In general today, cryptocurrency uses are still limited, often to high-end purchases, and are not readily accepted by most merchants.
The novelty of bitcoin and its particularly limited and volatile nature leave many critics doubtful. While there is a belief that Tesla’s investment in bitcoin will cause other companies to follow its lead, as some companies have already done, it may be better to err on the side of caution for now.