What Tesla’s bitcoin sale means for the crypto outlook
by James · July 21, 2022
On Wednesday evening, Tesla reported in its second quarter results that it sold 75% of its bitcoin holdings for $936 million. The company said it was to maximize its cash position amid Covid-related uncertainty in China. But the move comes about 18 months after the company shocked financial markets by buying $1.5 billion worth of bitcoin, saying in a filing at the time that it believes in the crypto’s “long-term potential” both as an investment and as a liquid alternative to cash. Bitcoin’s price then rose to its all-time high of around $68,980 in November, but then fell to a 2022 low of about $17,600 last month. Tesla’s validation helped spur bitcoin’s price rally in 2021, with new and existing investors rallying around the idea that it would lead to more companies buying crypto as part of their financial management. Cathie Wood’s Ark Invest estimated that if 1% of the corporate cash of every company in the S & P 500 were converted to bitcoin, the bitcoin price would increase by more than $40,000; if each company converted 10%, $400,000 was a reasonable prospect for bitcoin. That theory seems even more far-fetched with Tesla’s reversal. Nevertheless, many investors are unfazed by Tesla’s decision. They say the company did what was best for it in the short term in light of what CEO Musk has called a “super bad” economy. These investors believe bitcoin is bigger than Tesla or its high-profile CEO, and that its long-term use case as a hedge against inflation still holds. In addition, bitcoin held on to this week’s gains even after Tesla’s announcement, they note. “Such a significant amount of bitcoin was dumped and the market was not only able to handle it from a liquidity perspective, but we even saw a rally and price support around the key psychological barrier of $20,000,” said Leah Wald, co-founder and CEO of digital asset fund manager Valkyrie Investments. “The long-term outlook remains bright, especially when you consider all the investments being made in digital asset infrastructure.” Investment asset vs cash alternative When Tesla bought bitcoin in February 2021, they also said they would start accepting bitcoin as a payment method for their products (which they took away three months later). The announcement followed that of Microstrategy and Block, then Square, investing millions of their cash reserves in bitcoin last fall. The revelation differed from the impassioned sermons about bitcoin’s long-term promise delivered by Microstrategy CEO Michael Saylor and Block CEO Jack Dorsey. Tesla was interested in bitcoin’s transaction capabilities; if it could be easily bought, sold and moved around. “There are real differences in how and why people decided to hold bitcoin on a balance sheet, that’s indicative of the rest of the crypto market,” said Noah Hamman, CEO of AdvisorShares, which manages the AdvisorShares Managed Bitcoin Strategy ETF. “Some people are absolute believers and want to hold it forever. But a lot of people, probably most, they’re going to be more transactional and want to manage the risk of anything they hold as volatile as [bitcoin].” Wall Street analysts said Thursday it was a good move by Tesla since the EV maker’s stock had taken on bitcoin’s inherent volatility. “Although management noted it remains open to owning bitcoin, the selloff should improve sentiment as volatility in bitcoin has reflected negatively on TSLA stock historically,” Baird’s Ben Kallo said Thursday. Chris Kline, COO and co-founder of Bitcoin IRA, noted that capital-intensive industries have stricter cash flow needs, while others may have more long-term flexibility. “This narrative has only just begun,” he said. “As we face a larger currency conversation, diversifying the balance sheet will be a mandate going forward. for businesses. Companies prefer liquidity, especially in uncertain times. Bitcoin fulfilled that premise for Tesla in this use case. ” Hamman said Tesla’s announcement will have “not a very big impact at all, or maybe a positive impact.” He believes there is a larger factor at play. “Regulation is coming and depending on what it looks like, it can really advance the value of what blockchain and bitcoin can be, but it can also really dampen it if the rules and regulations that start to come are overly aggressive or take away from the value and benefit which bitcoin and blockchain should bring,” Hamman said. – CNBC’s Yun Li contributed reporting.
