A Saxo Bank strategist warned that Tesla’s decision to invest $1.5 billion of Bitcoin exposes the company to ‘immense’ risk that could wipe out its annual profit if the cryptocurrency’s price plummets.
The move sent the price of Bitcoin to new all-time highs of more than $48,000, but some analysts were skeptical of the purchase, noting the extreme volatility of the crypto.
“CEO Elon Musk has dramatically increased the risk of Tesla,” Peter Garnry, head of equity strategy at Saxo Bank, said on Tuesday. “In our view, the move by Tesla is both risky and obfuscating the valuation of the company. With the volatility in bitcoin, Tesla could easily experience a 50% loss on their $1.5 billion investment.”
Garnry added that a price drop of that magnitude would add a $750 million paper loss. Which is almost equal to the $812 million net income it recorded in 2020.
Tesla Only Allocated 7.7% Of Its Cash Reserves To Bitcoin
Another question that has risen in the midst of this purchase. Is why Tesla only allocated 7.7% of its cash reserves to Bitcoin. Under current accounting rules, digital assets are considered “indefinite-lived” intangible assets. According to Avanti founder Caitlin Long, this means that any depreciation in their fair values below their carrying values at any point after the acquisition will require Tesla to recognize an “impairment charge.”
Additionally, Tesla can’t make any upward revisions in market price until a sale. This impairment charge opens companies up to many negative impacts, including sudden hits to their earnings.
What also remains unknown, as Treasury Partners managing director Jerry Klein pointed out. Is how shareholders would react “if a decline in bitcoin’s price negatively affects Tesla’s future earnings. Most shareholders own Tesla because they expect them to make money selling cars, not by trading cryptocurrencies with shareholder capital.”
Backers of Bitcoin argue however, that institutional investment will continue to push it higher. “This moment will likely be looked upon in years to come as a genuine tipping point,” Dermot O’Riordan of Eden Block said. “Elon and Tesla’s support legitimizes crypto and opens up bitcoin to a whole new class of retail and institutional investors.”
