There’s no doubting the fact that Elon Musk has been the center of attention as of late when it comes to the financial world. From skyrocketing to the position as the world’s richest person to his continued space exploration pursuits, the man is a magnet for attention. To add to his draw, Elon Musk and Tesla have recently made a big plunge into the cryptocurrency world. But, is this a good thing or not? Well, in this article, I will share with you the implications of Elon Musk’s recent Bitcoin purchase!
You may or may not be aware but on Monday, February 8, 2021, Elon Musk and Tesla bought $1.5 billion dollars worth of Bitcoin. While this may or may not seem like a big purchase for a company of their size, the acquisition of this large sum of cryptocurrency has sent ripples through the financial community. For Tesla, this has shifted their cash position from having more than $19 billion in cash at the end of 2020 to having a more diversified cash position given its investment in Bitcoin. Now, notice I said that Tesla bought Bitcoin and not some of the other coins? Why is that and why did Elon make this move into crypto in the first place?
Well, when it comes to cryptocurrencies, there’s no denying that Bitcoin is the coin that has best established itself in this new set of financial assets. When people think of the future of cryptocurrencies, they think of Bitcoin, and holding the most popular coin definitely seems like the most logical strategy for Tesla to have taken. In fact, it’s no shock that Elon bought into Bitcoin as for a short while in January, he had #bitcoin in his Twitter bio.
Now, while some people may question this investment in Bitcoin, Elon and Tesla are actually not the first to be making this move. In fact, when you think about it, Elon is too smart of a guy to be making haphazard decisions with the money that supports the companies that will ultimately leave his legacy on this earth. Many people believe that he’s been monitoring companies like MicroStrategy which bought $250 million worth of Bitcoin in August. Tesla and these other Bitcoin investors state that they are making this move to diversify their holdings however only time will tell as to whether this move will pay off.
So next, how did Tesla’s purchase of Bitcoin affect the financial world? Well, as the news of Tesla’s big purchase hit the airwaves, the price of Bitcoin jumped 17% to $44,220, a record high! Now, of course for Tesla and other investors with money in Bitcoin, this is great news however it truly tells the tale of the volatility of Bitcoin and other speculative assets. You see, for the most part, the value of these coins are based on supply and demand and as people see iconic figures like Elon Musk buying up cryptocurrencies, others will follow suit and as demand rises, price rises as well. Unfortunately, the same phenomenon can easily go the other way. Say Elon uses some of his newly-bought crypto or unloads some of it, for really any reason, there’s a good chance the price will drop soon after as it may be seen as an indicator of the value of this digital asset.
In fact, there’s really no better example of how speculative these digital assets are than Dogecoin. Often seen as a joke coin, the price of the coin has skyrocketed in recent days simply due to a few tweets sent out my Elon supporting the coin. Funny enough, there’s even a website called “Elon Stocks” where you can sign up for text alerts letting you know anytime Elon Musk tweets about a stock. If this isn’t a good example of how removed price has gotten from inherent value than I don’t know what is.
Now, one angle that has to be looked at when it comes to Tesla’s recent Bitcoin purchase is how this affects the adoption of Bitcoin and other cryptocurrencies in the financial world. My personal opinion is that the purchase of Bitcoin by Tesla is both a win and a loss for the progression of the widespread use of crypto amongst the general population.
On the positive side, I truly feel as though people seeing someone they look up to like Elon Musk investing his money into this asset gives them confidence that cryptocurrencies are the way of the future and that more people should educate themselves on their properties and potential uses. Moreover, Tesla will be accepting Bitcoin as payment for their vehicles and other products which is offering Bitcoin a new opportunity to increases its transactional applications. In my opinion, this is key to more and more people becoming comfortable with the idea of cryptocurrencies in general being a good place to put their money.
On the negative side, this actually leaves less Bitcoin in the market for those who want to acquire some. In fact, presently, 78% of the Bitcoin in existence has either been lost or is being held close by long-term investors which means that getting your hands on Bitcoin may soon present challenges that extend beyond just its price point. As it stands, this leaves less than four million Bitcoins to be shared between the rest of the world’s population which I believe stunts the coin’s ability to become more widespread. However, with this being said, just because Bitcoin will be in short supply doesn’t mean that it won’t still prompt other mainstay coins to gain popularity amongst the masses.
Now, of course Elon Musk is much smarter than me so he probably has more reasons than I could ever imagine for investing in Bitcoin, but I want to share some reasons why I think that his purchase of this popular cryptocurrency can pay off big time for Tesla.
As I just mentioned, Tesla will soon be accepting Bitcoin as payment for their products and given the limited nature of Bitcoin, this means that over time they will be able to accumulate more and more of this scarce resource. Of course, as supply decreases, price increases and I think that this will support Elon’s financial move of shifting his cash into this asset which many people believe still has a ton of upside.
Now, maybe more importantly, is that starting to gain more of a crypto position allows Tesla and any other crypto holders a means of hedging against the deflation of more traditional currencies. I don’t think it’s news to anyone that countries like the United States has been printing an obscene amount of money and as more money circulates in the economy, the less value that money has. Therefore, I think it’s quite forward thinking of people to move at least some money into cryptocurrencies so that if the US dollar begins to decline further that some of this risk is offset by their digital asset holdings.
At this point, we’ve gone over the recent purchase of Bitcoin by Elon Musk, its impact on prices and crypto adoption and even what this means for Tesla. However, the biggest impact many be on investors like you and I and let me tell you why that is right now.
The fact that so many people idolize Elon Musk is both a blessing and a curse. On the bright side, he’s inspiring his followers to relentlessly pursue their dreams, self-educate themselves and think bigger. On the other hand, he is leading a ton of people to buy into cryptocurrencies without doing their own due diligence. Sadly, most new investors are investing with blind faith that because Elon is doing so that they can’t lose by following suit. Unfortunately, this approach simply cannot be relied upon and as wise as Elon is, he’s not perfect. However, the main difference between Elon and his newly invested in crypto followers, is that Elon has the money to spend on these speculative assets while the latter may not.
What makes this situation worse is that we are currently going through a very tough economic time which means that most people’s financial situations are already bleak as it is an adding in investing in a speculative asset like Bitcoin may put their financial position in even more jeopardy if the asset takes a dip.
Now, the other group of individuals whose fate is tied to this recent purchase are Tesla shareholders. Sure, if Bitcoin continues to rise then the value of Tesla stock will rise with it and this will make Tesla stock owners quite content however there is the risk of the opposite happening too. If Bitcoin falters, shareholders may begin to question Elon’s money management strategies for his business and maybe his intention as a whole. While I don’t think he moved enough of his cash into Bitcoin to warrant a ton of concern in this area, it’s still worth noting.
Finally, we can’t overlook the fact that whenever you hold cryptocurrency, there is a risk of theft or loss. One would imagine that Tesla would have very strict protocols around the maintenance of their cryptocurrency however large sums of crypto have been lost or stolen before which adds a natural risk to their holdings that typically aren’t in place when holding fiat currency.
In summation, how this large purchase of Bitcoin will play out is anyone’s guess. It would lead to widespread adoption of cryptocurrencies across the globe or it could lead to a cash shortage for Tesla, only time will tell!