Tesla announced its 1.5 billion investment, as well as plans to accept the legendary cryptocurrency, bitcoin, as the form of payment. Following, the world’s largest digital crypto hit a new record, briefly reaching $48,000 on Tuesday. Since December, bitcoin has been on everybody’s tongue. After reaching its (then) milestone of $20 000, bitcoin has continued to grow and in 2021 alone, it has recorded a 60% growth. Last year, many hedge funds and fintech giants such as PayPal started to adopt cryptocurrency, being one of the reasons for bitcoin’s growth. Many people have also tried to connect the prices of bitcoin and other digital currencies with the billionaire entrepreneur, Elon Musk. Thus, some of not surprised by the new record set by bitcoin after Tesla’s announcement as they believe that Tesla’s CEO, Musk, is the best advertisement for bitcoin.
Why Did Musk’s Company Decide For The Bitcoin Purchase?
In a filing with the Securities and Exchange Commission, Musk’s company explained their bitcoin purchase with the wish for “more flexibility to further diversify and maximize returns on our cash.”
First Automaker To Accept Payments With Crypto
Moreover, their plan to accept payment in bitcoin makes them the first large automaker to do so and aligns nicely with the company’s mission of being the most innovative among its competitors. However, we cannot expect the payment arrangements to start right ahead. According to Tesla’s statement, the procedure will be “subject to applicable laws and initially on a limited basis.”
How Large Is Tesla’s Purchase In Relation To The S&P 500 Members?
After having an extraordinary year and quadrupling its value, so far in 2021 Bitcoin is up another 60%. Having said that, experts point out that while the $1.5 billion investment is approximately 8% of Tesla’s recent cash reserves, it is still not a huge sum compared to S&P 500 members. Tesla’s purchase amounts to 0.05% of the cash and cash-equivalent assets that are held on the balance sheets of the other members, with a combined value of about $.2.79 trillion.
Is Bitcoin Too Volatile?
Bitcoin is seen as volatile and some corporate finance experts believe that the decision is unnecessary and will add too high risk to the balance sheet of the automaker. In their statement, Tesla themselves acknowledged bitcoin’s volatility, saying, “If we hold digital assets and their values decrease relative to our purchase prices, our financial condition may be harmed.”
Similarly, James Angel, an associate professor at Georgetown University says that Tesla’s move is too risky. “Corporate cash managers are generally quite conservative and invest corporate cash balances in safe liquid assets. Bitcoin is highly volatile and can easily go up or down 10% in a day or 50% in a year – certainly not a good short-term store of value,” Angel says.
Tesla’s CEO Musk Being The Most Credible Endorsement Of Bitcoin
Others are more optimistic.“It’s hard to imagine, frankly a more credible endorsement than one coming from folks like Elon [Musk] who are inventing the future,” the visiting fellow at the London School of Economics, Garrick Hileman, said.
Similarly, Seamus Donoghue, vice president of sales and business development at digital infrastructure provider Metaco, believes that while Bitcoin may still be developing its status as a treasury asset, it is way on its way and the heightened interest from Tesla or MicroStrategy will help the crypto immensely.
“Bitcoin as a corporate treasury asset is not yet a mainstream business strategy, but firms like MicroStrategy and now Tesla are highly visible advocates,” said Donoghue. “With such vocal sponsors leading corporate adoption, further adoption will follow much faster than currently expected.”
Different Adoption Of Bitcoin As It Hits Its Record
It is clear that not every industry will adopt bitcoin in the same way and timeframe. It is expected that tech firms and financial companies will be the first ones to broadly adopt it. Experts speculate that the tech giants such as Apple or Facebook may come with an announcement to adopt bitcoin or another crypto to their services within a year. For more traditional sectors, it will likely take longer.
The Power Of Elon Musk’s Tweets On Cryptocurrency
The move of Tesla comes days after Musk’s Twitter behavior, sending bitcoin and the “joke” cryptocurrency dogecoin up by tweeting about it. Just by adding #bitcoin to his bio, Musk was a huge contributing factor to the largest digital currency’s 20% spike.
Apart from diversification, what could be another reason for Tesla’s purchase? Some analysts say it is a publicity stunt of Musk Others think that it is brand management as bitcoin’s image as a decentralized asset fits the image of Tesla and Musk himself.
DogeCoin Spiking Up By 1000%
Recently, Musk has also been attributed to sending cryptocurrency DogeCoin soaring and reaching its new record. DogeCoin that initially started as a joke, having the meme of a surprised Shiba Inu dog for its symbol, jumped up by almost 1000% last week. The spike came after Musk tweeted about DogeCoin, calling it the “people’s crypto”.
“It’s just a sea change in sentiment,” said Meltem Demirors, the chief strategy officer at CoinShares, a cryptocurrency asset manager. “We went from being mocked and ridiculed to having the richest man in the world talking about it.”
Is Musk The Reason Behind Cryptocurrency’s Performance And Bitcoin Record?
We cannot, however, say that Musk is the majority of the reason behind cryptocurrency’s performance. The momentum has been building for a year. PayPal and other consumer apps began allowing their customers to hold and sell cryptocurrencies. Additionally, large hedge funds such as Paul Tudor Jones and Stanley Druckenmiller also put money in the crypto market.
At the end of 2020, the head of real asset strategy at Wells Fargo, John LaForge, commented on Bitcoin’s growth. “Over the past 12 years, [bitcoin and cryptocurrencies] have risen from literally nothing to $560 billion in market capitalization,” LaForge said. “Fads don’t typically last 12 years. There are good reasons for this—reasons that every investor should hear. As we roll into 2021, we’ll be discussing the digital asset space more—its upside and downside.”
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