One of the benefits of being able to write about markets is that I sometimes just get to collect my thoughts and think hard about a concept or a topic that is quite complicated, in order to try and make sense of it. Bitcoin (and other cryptocurrencies) is an incredibly complex topic and I have spent a lot of time over the past few years trying to understand it and learn whether it has value as an investment.
This week Tesla announced that they would purchase $1.5 Billion USD worth of Bitcoin. They are going to hold the Bitcoin on their corporate balance sheet and the purchase represents about 8% of their cash available. The argument that Tesla will make in purchasing this Bitcoin is that the USD is being debased. This means that the US Government, both the Treasury and the Federal Reserve, are pursuing policies designed to print money, increase inflation, and reduce the value of the dollar.
Tesla is saying, "why should we keep our money in dollars which are worth less and less all the time, when we could instead buy Bitcoin which is worth more and more all the time" (maybe)? And they have a point! The US government was running massive fiscal deficits even before COVID, and the deficits in 2020 and likely 2021 are unprecedented in their size.
The Federal Reserve has pursued a policy of higher inflation (though they've been very unsuccessful in making CPI inflation actually go higher) for most of the past decade. Interest rates are at 0% or near 0% and they've actively engaged in quantitative easing to control the flow of money into the economy. All of this should have an inflationary impact on the US dollar (though there is some debate on the actual effect of quantitative easing which is beyond the scope of this article and probably not very interesting to the vast majority of people).
Sufficive to say, the value of the dollar is looking a little shaky! This is not a US only problem either. Almost all developed countries have a massive government debt problem, and they are all trying to inflate their way out of it. This does not bode well for the value of people's savings denominated in their currencies. If you have savings accounts, GICs, or money under your mattress, you should be worried.
So I agree with Tesla. There is a problem. I'm just not sure they have found the solution however. From a corporate governance standpoint, I hate this decision by Tesla. Tesla is a high growth, cash burning, low earnings company right now. They have consistently gone to the public markets to raise more debt and more equity over the past few years, and that is for one simple reason. They have spent much more than they make.
As a high growth company, Tesla should be spending more than they make IF they think that they will grow to a size large enough that the situation will reverse and they will start to make more than they spend. I have no idea if this will happen for Tesla, but there are indications that they might be able to achieve this. However in the short term, Tesla still spends a lot and their cash is valuable to them because there are lots of uses for it.
So the move to buy Bitcoin is puzzling to me. Tesla doesn't pay their employees in Bitcoin. They don't pay their suppliers in Bitcoin. They don't pay their taxes in Bitcoin. They don't owe any money in Bitcoin. So why would they want to hold Bitcoin? The only reason I can think of, is that they are speculating that the price of Bitcoin is going to go up. Now Tesla won't come out and say they are speculating. They will say that Bitcoin is a better store of value than dollars, and that in fact, what they're doing is protecting shareholders.
I find this argument quite comical. Bitcoin's volatility is off the charts. It has defied experts by rising to as high as $50,000 per Bitcoin at the moment, but the ride has not been smooth at all. Bitcoin peaked at around $20,000 at the end of 2017 and over the next year proceeded to lose 85% of its value down to around $3,000 by December 2018. It perked up in 2019 and rose back above $10,000 a coin only to quadruple in late 2020-2021 to hit it's current trading range near $50,000.
If Tesla had made their Bitcoin purchase in 2017 at $20,000 and then needed to spend that money a year later when it was trading at $3000 a Bitcoin, their shareholders would not have been happy. They essentially would have lit $1.275 BILLION on fire. Not ideal for a company that needs cash all the time.
There is no guarantees that Bitcoin will continue to rise from where it is. Many people I speak to who invest in Bitcoin believe in it and believe they can calculate where Bitcoin will rise to. I can tell you that no one is able to predict this with certainty. There are models which people are following which seem to have reflected the price movements well in the past, but that is no guarantee that those models won't become outdated at any point in the future. If anyone tells you that it is guaranteed that Bitcoin will go up, they don't know what they are talking about. No one can guarantee that.
So if there is no guarantees, this means Tesla is speculating – as I said above. Speculation is risky, and Tesla might be taking a big risk, because they could lose 85% of their money, or more! This is where this decision really falls apart for me. It would be no different if Tesla all of the sudden decided that they thought the Norwegian Krone is going to appreciate vs the USD and they want to put a portion of Tesla's treasury into Krone.
Why is it a good idea for a car company to become a currency speculator even if that car company is headed by the richest person on Earth? What about Elon Musk's skillset is well suited towards currency speculation? Does he have any experience speculating on currencies? Does Tesla need to take on this risk? I don't think so. If they have cash they are going to spend in the next year or two, they would be better to leave it in dollars because their expenses are in dollars (or other national currencies but certainly not in Bitcoin).
If they are not going to spend it in the next year or two, then there is a question of why shouldn't they return it to shareholders or pay down debt with it. The last thing I would want them to do as a shareholder is introduce a new risk to the company. I think Tesla is risky enough already.
So usually at this point, the Bitcoin enthusiast will argue, "But Craig you just don't understand, there is a new monetary paradigm coming and Tesla is getting in on it. Every company will be doing this soon." Sure, maybe – I won't deny that is a possibility. There are certainly indications that Bitcoin is gaining wider acceptance. Mastercard, and Bank of New York Mellon both incorporated parts of Bitcoin into their business this week. Maybe we are on the verge of a new monetary paradigm. Maybe one day I will buy my Tesla with Bitcoin instead of Canadian dollars or US dollars. It's not impossible. If I had to guess, I'd say no but who can say for sure?
No One Knows
One thing I do know for sure though, is that no one else knows either. Not your friend who mines Bitcoin and keeps his own crypto wallet, not federal reserve chairman Jay Powell, not Chamath Palipataya, and yes not even Elon Musk knows for sure where Bitcoin will end up. We can speculate, but we simply can't know for sure.
So getting back to the original question. Will Bitcoin become the currency of the future? My answer is a very unsatisfying, I don't know, maybe? One thing I am sure of though is that Tesla's decision to buy Bitcoin hasn't really changed my opinion of whether it will or it won't.
- Craig White, BA, LL.B., CIM
Craig White is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Craig White an Investment Advisor for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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