What is going on with bitcoin?
Bitcoin, which has experienced a historic bull run over the past few months, recently broke through the USD$55K glass ceiling, and smashed through a USD$1 trillion market cap in February 2021.
How did the cryptoasset do this?
The cryptoasset has soared in the last few months with the help of a stream of investments from major multi-national companies such as Tesla. However, it wasn’t all sunshine and rainbows for bitcoin. In fact, eToro has seen bitcoin’s investor demographic change dramatically since its inception. At first, it was the ‘cypherpunks’ who dabbled in bitcoin, as it was born out of the Global Financial Crisis (GFC). During this time, people became interested in a decentralised monetary system, bypassing banks or payment providers.
From 2016, more retail investors entered the space, especially in late 2017 when the price of bitcoin rallied to a then all-time high of USD$20K. Then, towards the end of 2020 we saw far more institutional investment into bitcoin, whether through buying the underlying asset directly, buying into an investment trust or getting exposure via derivatives contracts such as futures and options. Institutional investment was highlighted when listed companies such as Square and MicroStrategy purchased bitcoin to hold in reserve as an inflation hedge.
This may be prompting even more everyday Joes and Janes into getting a slice of the bitcoin pie. On eToro alone, the global number of people holding bitcoin since 16 February 2021 increased by 131% since the same period last year.
So, why does Musk care so much about bitcoin?
Tesla’s CEO is notorious for being an outspoken supporter for cryptoassets, including bitcoin for some time now. In January 2020, the tech billionaire added ‘#bitcoin’ to his Twitter bio, which bolstered the cryptoasset’s price by as much as 20%.
Shortly after, Tesla announced its USD$1.5 billion investment into bitcoin, following a change in its investment policy. This investment was part of the electric vehicle manufacturer’s plans to start accepting payments for its vehicles in bitcoin “subject to applicable laws and initially on a limited basis” – according to its filing with the Securities and Exchange Commission (SEC). The news sent the price of bitcoin skyrocketing over 67 %.
This large investment could quickly become very valuable, helping Tesla to maintain its status as a profitable company.
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Are there any risks with Tesla’s investment into bitcoin?
While the investment may seem like an ideal pairing, not all experts agree. According to GLJ Research analyst Gordon Johnson, “Investment into bitcoin is a sign that the automaker has run out of viable internal uses of its capital. Tesla took a large chunk of the cash generated from three secondary equity offerings in 2020, and invested it in a highly volatile and allegedly manipulated cryptocurrency.”
Johnson believes that the bitcoin news was released at a time when the company was facing “negative business developments” and was using the investment as a distraction. He also pointed to declining car sales in China, quality control issues, delay in the German factory, and the inability to obtain the full $USD1.2 billion in subsidies in the region as the negative factors.
But then there’s also risks involved with bitcoin itself. On February 22, bitcoin’s price fell by as much as 20%, at one point dipping below the USD$45,000 mark, before making a slight recovery. Some analysts have attributed Tesla’s share price plummet to its investment in bitcoin – dropping more than 11% on February 23. This drop also cost Musk’s status as the world’s richest man to Amazon’s Jeff Bezos, according to Bloomberg’s Billionaires Index.
The cryptoasset then descended further, after US Treasury Secretary Janet Yellen issued a warning about bitcoin in February this year, claiming the that cryptocurrency was extremely inefficient. However, this was a risk that Tesla likely expected. According to Tesla’s own admission in its SEC filing, the prices of cryptoassets have been in the past and may continue to be highly volatile.
What does this investment mean for investors?
Despite the risks, some investors are seeing Tesla’s investment as a huge step in favour of institutional and retail adoption of bitcoin. It is likely the crypto community will be keenly watching to see whether other major companies will continue to follow suit, and if Tesla will stay invested in the long-term future.
As bitcoin continues to appreciate in price, it’s being increasingly recognised as a hedge against inflation with similar properties to gold, given its finite supply. However, investors should be cautious when buying into volatile assets like bitcoin, and maintain responsible investing principles including adopting a long-term strategy and diversifying their portfolios in order to protect themselves for the long run. And, if ever in doubt see the help of a professional financial advisor.