Two weeks ago, US carmaker Tesla disclosed in its securities filings that it holds $1.5 billion worth of Bitcoin. The Fortune 500 company’s move into the cryptocurrency sector received applause from an army of bitcoin backers. Nonetheless, it left its stock traders with a sore throat.
The cost of one Tesla share (NASDAQ: TSLA) fell by more than 10 percent from the day it announced its involvement in the Bitcoin space. As of Tuesday’s close, it was trading for $796.22. Meanwhile, on Wednesday, its value plunged to near $790 in the pre-market session, down more than 12 percent from its record high of $900.40.
In contrast, Bitcoin jumped to new record highs in the same period. The cryptocurrency broke above $51,700 for the first time in history, up more than 54 percent since Tesla’s announcement.
“Tesla could start a deeper correction if it trades below $780,” warned Michael A. Gayerd, portfolio manager at New York-based Toroso Asset Management. “Even though Bitcoin remains strong, it looks like the auto maker’s investors have not appreciated the decision to buy Bitcoin.”
Meanwhile, other supportive catalysts, including MicroStrategy’s $600 million investment plans and Mastercard and Bank of America Mellon’s decision to integrated crypto services, further provided tailwinds to the Bitcoin price rally.
Backlash Against Tesla
Tesla’s move into the Bitcoin sector sparked Nouriel Roubini, an economist with a long history of making anti-bitcoin remarks, to write an whole opinion editorial for the Financial Times.
In his piece, Mr. Roubini compared Tesla and MicroStrategy with the likes of snake oil salesmen who serve their own benefits by luring others into a trap. He wrote:
“Tesla’s Elon Musk and MicroStrategy’s Michael Saylor may be betting the house on bitcoin. That doesn’t mean you should.”
In a separate statement, Jerry Klein, a managing director at New York-based investment management firm Treasury Partners, noted that Tesla’s bitcoin investment would not bring more corporates to the cryptocurrency party, fearing price volatility.
“Corporations invest their cash in very high quality, short-term fixed income securities, and are willing to accept a relatively low rate of return. I don’t think there is a case to be made for investing corporate cash in a risky asset like bitcoin, where they could experience significant declines,”he told FT.
No Big Risks
Multiple reports indicate that Tesla merely used 8-10 percent of its cash reserves to invest in Bitcoin. Thereby, only a likelihood of the cryptocurrency to fall to zero would negate the allocated reserves entirely, which seems less likely to happen.
Part of the reason is Bitcoin’s growing use-case as a hedging asset against inflation. Retail traders have locked their funds inside the cryptocurrency markets, fearing that the global central banks would continue their quantitative easing policies. In turn, their cash-based savings would lose value over time.
Bitcoin has surged by more than 1,100 percent since March against the same narrative. Meanwhile, Tesla’s investment has already made the company at least $29 million in profits.