How Tesla’s Purchase of Bitcoin Can Shape the Future

  • Tesla Purchased $1.5 Billion Worth of Bitcoin
  • Bitcoin’s Price Soared to $48,000 After the Big Reveal
  • Many Other Institutions Are Also Starting to Accept Cryptocurrency
  • The Future of Crypto Is Uncertain, but the Discussions About Its Volatility Are Still There
  • This Purchase Will Have a Ripple Effect Across Corporation Around the Globe

Many corporations have recently embraced the power of cryptocurrencies. From PayPal accepting crypto as a suitable form of payment, to Tesla Inc. who has recently made an investment in bitcoin.

As such, the level of acceptance when it comes to digital assets is increasing.

The electric-car making giant said recently in a public filing that it had indeed purchased $1.5 billion worth of bitcoin and it plans to start accepting payment in the cryptocurrency for its products going forward sometime in the future. As a result, this is seen as a push to make bitcoin more legitimate in the eyes of a masses, an asset that did not even exist over a decade ago.

One of the main reasons why many corporations stay away from bitcoin is due to the fact that it is highly volatile. It can raise or drop its price unexpectedly and at an instant. As such, this is obviously seen as an unnecessary addition of risk to the Tesla balance sheet.

So why would Musk & Co expose the company to such a risk? Here are some reasons as to why this could be the case.

Tesla states that it sees bitcoin as a chance to diversify its cash and cash-equivalent holdings. Corporations typically hold excess cash or cash-equivalents on their books in order for them to provide operational liquidity and generate returns, all while limiting any potential risks associated with it. In this regard, Tesla essentially updated their investment policy in order to provide them with more flexibility and the ability to diversify and maximize their returns.

And what was the result of Tesla’s $1.5 billion purchase of bitcoin? The asset rose to a record of more than $48,000 in value. As such, many analysts speculate that Tesla’s investment could be a game-changer for the cryptocurrency’s value as well as acceptance.

Bitcoin finished the last year with excellent progress, quadrupling in value. Due to this, other investors such as Stanley Druckenmiller and Paul Tudor Jones boosted the token as-well, and as such, bitcoin has become viewed as more main stream and acceptable for investors.

Bitcoin, Cryptocurrency and the Blockchain Quickly Explained

Just so you have some context as to why all of this actually matters, and what exactly this article is about, here is a brief explanation of what everything is and how everything works.

Cryptocurrency is a form of payment, one which can be exchanged on the internet for goods and services. Tesla is one of the latest companies to adapt to this new change, and there are other companies out there that even have developed their own cryptocurrencies known as tokens that are specifically made for the good or service that those specific companies provide.

Bitcoin is a digital currency, that launched in January of 2009, one that is distributed, traded and stored through the use of a decentralized ledger system known as the blockchain. Blockchain is a specific type of database that stores its information in blocks of data that are chained together. Bitcoin’s blockchain Is used in a decentralized way to ensure that not one single person has control over it.

The main reason why companies and corporations have avoided this technology is due to the fact that either they don’t fully understand it, or due to the fact that it is highly volatile and that it can quickly climb or drop in value unlike a traditional stock exchange where the price can be a lot more stable. Just last year, Bitcoin had a price of $10,000, now it has a price of $48,000. Let that sink in for a bit, as to how volatile cryptocurrency can be and why many companies saw it as a huge risk.

However, Bitcoin has a finite number of coins able to be mined. 21,000,000. Scarcity equals value.

What Tesla Purchase Means for the Future of Bitcoin and Cryptocurrencies

The Tesla CEO has invested many of his millions that were earned from the sale of an internet business into a new startup known as X.com, that became PayPal Holdings 20 years later.

PayPal, in November of 2020 opened up its platform to cryptocurrency across all U.S. customers.

As central banks are pushing trillions of dollars throughout a monthly basis within markets, many firms are starting to see holding these dollars as a potential risk.

Aside from Tesla, MassMutual, an insurance company, purchased $100 million of bitcoin for its general investment fund.  Square, PayPal and Visa all announced investments as well, as to allow bitcoin payments on their platform. As well as the City of Miami.

There have been many debates around what determines the value of bitcoin and other cryptocurrencies. Aside from the decentralized finance (DeFi) and tokenization initiatives, the majority of crypto do not have cash flows, earnings or other components that are associated with other financial instruments.

This recent push by Tesla as well as other companies that are seeking to accept and use bitcoin as a payment option showcases us that institutions are starting to understand and accept the payments used for cryptocurrency as a whole.

Tesla as a company justified this change in the way it manages its treasury reserves by claiming that when they invest in bitcoin, they will have a lot more flexibility to further diversify and maximize their returns on cash. As such, Tesla has placed 8% of its reserves in bitcoin. If other companies such as Facebook, Twitter, Google, Microsoft and even apple did the same, this would be a $7 billion investment, and it would still be less than 1% of the current bitcoin market. but, at the same time will further legitimize the use of bitcoin and bring it to the forefront.

The issue here is with the effect this would have on company share prices. Tesla’s share rose 2% on the day they announced the investment, but has fallen to more than double that amount over the following days. As a result, is this a foreshadowing that the future of stock markets can get a lot choppier?

Global regulators will quite possibly be concerned about volatility spillover as a result from digital asset prices into traditional capital markets. As a result, they may not initially permit what could quickly become effective proxy approval by the back door for companies that hold large proportions of volatile assets on their balance sheets.

Currency or Investment

The announcement of the acceptance when it comes to cryptocurrencies is just one part of the big pictures. Customers and people who are not crypto enthusiasts need to be able to easily understand, use and transact bitcoin as well as other cryptocurrency transactions. This emergence of incumbent payment processors and popular organizations with crypto payment options might have a significant impact upon this and might just be what the world needs in order to be encouraged to trust cryptocurrencies.

Another important factor is the importance of safeguarding information as well as the data associated with it. The Initial Coin Offering or ICO may be history, but bitcoin and other cryptocurrencies are becoming more valuable and are used much more frequently than ever before. As such, with the higher popularity, the higher the potential for breaches and theft is as-well. Which is why I have the majority of my Bitcoin in Cold offline storage.

When we look at it from all angles, what the end result of the continued adoption, discussion and price increase of bitcoin is the diversification of the cryptocurrency world as a whole. This was already the case back in bitcoins initial peak in 2017 however we can expect it to have similar effects going forward to 2021 and beyond.

For 2021, the push for central bank digital currencies is large, these are known as CBDCs, and it is an indication that institutions as well as policy makers are already working on stable crypto developments.

This news that Tesla Inc. has purchased Bitcoin is exciting for the blockchain and cryptocurrency world. The volatility in price, and the institutional investment as well as the utilization of a fiat alternative is on the rise going forward, and we are sure to see a lot more larger organizations adapt to this new technology and accept it as the future.

For the time being, bitcoin does indeed look like a buy asset on the back of the Tesla announcement itself, and as a result the crypto community will be following with close attention to see if other major companies follow in the same footsteps. This also raises curiosity if Tesla has the conviction to stay invested when the next quarterly announcements come. If a trend like this were to continue, a lot of companies will be coming over to the crypto market, and over time it even has the potential to become fully mainstream.

I personally have my Bitcoin holdings as 2 percent of my cash reserve. I keep it between CoinBase and Cold storage.

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