Tesla’s Speculation on Bitcoin Turned Into Millions of (Unrealized) Profits

KEY TAKEAWAYS

• Tesla’s foray into Bitcoin has generated substantial returns
• The long-term implication of Tesla holding and accepting Bitcoin is that the U.S. government would likely support a payment system based on cryptocurrencies

When Tesla announced the plan to invest $1.5 billion, roughly 7% of the firm’s cash holding, into Bitcoin, it probably did foresee a decent return. In retrospect, calling the cash allocation strategy a sound decision is a gross understatement. After all, Tesla bought at an average price of $33,000, and the price of Bitcoin, at the time of writing, is $57,000 after a particularly brutal dive from its all-time high near $64,000. The electric vehicle maker’s latest foray into the crypto space has generated a $101 million gain after selling a mere 10% of the Bitcoin holdings.

The substantial gain from selling part of its Bitcoin holdings that Tesla conspicuously acquired early this year has stirred up a storm on Twitter, prompting Bitcoin skeptics to question the motive behind Tesla’s crypto acquisition. Dave Portnoy, the celebrity blogger, basically ripped Musk for amassing personal wealth from what is essentially a pump-and-dump scheme.

Musk foiled Portnoy with a resounding “No, you do not,” and continued to explain that the sale is merely to test the water and prove to skeptical equity investors that Bitcoin is, in fact, a “better alternative to holding cash on balance sheet”. Nevertheless, some Bitcoin enthusiasts might have gotten a bitter taste of betrayal as Tesla’s sell-off smeared what Musk had done to champion Bitcoin’s cause.

How much has Tesla made on Bitcoin

Tesla’s announcement of its $1.5 billion Bitcoin purchase in January this year was disclosed through the 10K form. The EV-maker’s Q1 report reveals that the company’s adjusted earnings of 93 cents a share, which exceeded Wall Street’s 80-cent average estimate by far, were partly buoyed by the sales of Bitcoin and regulatory credits — more than enough to offset the abysmal stock performance.

The EV’s Q1 results provide insight into the “effectiveness” of Bitcoin as an alternative treasury allocation strategy — the appreciation of the world’s largest cryptocurrency has dwarfed what Tesla earned from its core business of selling electric vehicles and providing software and other services.

If we run the numbers, Tesla booked a $101 million positive impact from the sale of Bitcoin. The cash flow statement shows that the sale garnered proceeds of $272 million, clinching a 59% profit. During the conference call, Zach Kirkhorn, the Master of Coins, stated that the transaction took place “later in March”, during which the price of Bitcoin has remained atypically stable, trading consistently near $55k. According to Shawn Tully’s estimate, the proceeds translate to the sale of around 4,900 Bitcoins. The March transaction leaves Tesla with around 38,300 bitcoins that cost $1.329 billion.

Actually, the economic profit is far greater than $101 million. The remaining Bitcoins are worth roughly $2.26 billion at $58,822 per coin, the price at the end of first quarter on March 31. In other words, Tesla did not make $101 million, but $1 billion in Bitcoin — which did not count for accounting purposes. This means that Tesla is sitting on roughly $1 billion of unrealized profit from Bitcoin, and could potentially be realized when the timing is convenient.

On the balance sheet, Tesla displays its “digital currency” holdings at $1.331 billion. The 2-million discrepancy is therefore deduced to have come from the sales of electric vehicles, after Musk famously declared in February that Tesla would accept Bitcoin in lieu of fiat currency.

Accepting Bitcoin as an alternative payment

Despite claiming to be decoupled from major assets, the crypto space is nonetheless intricately linked to the world of traditional finance and reacted in similar ways to fresh injection of funds, albeit with greater volatility. The price of Bitcoin soared after Tesla’s revelation to first overcome the $42k hurdle, and subsequently to the then ATH near $58k. The announcement was part of the treasury policy that allows Tesla to acquire more cryptocurrencies.

Many crypto skeptics think that the decision to tie Tesla’s fortune to an ultra-volatile investment vehicle was uninformed, to say the least. Others believe that Musk has sidetracked by the bounty of crypto and lost sight of the real innovation — making electric vehicles that could change the world. However, they cannot deny that Musk’s influence over the stock and crypto markets has eclipsed Ray Dario, Warren Buffett and earlier generations of business tycoons. His casual hop onto the voice chat app Clubhouse doubled its user base overnight; his cryptic tweet “Use signal”, a vague allusion to the communication software Signal, sent the share price of Signal Advance, a completely unrelated entity, soaring 11 times in a mere two days; not to mention Dogecoin, one of Musk’s favourite cryptocurrencies, whose recent parabolic rise directly benefited from Musk’s Twitter exposure. Just a few days ago, DOGE spurted 50% ahead of Musk’s appearance on Saturday Night Live. The multi-billionaire’s mountain-moving superpower is tested once and again in both the traditional financial and the fintech space.

Tesla’s vision

Tesla’s foray into cryptocurrencies has more profound implications that seem to be conveniently overlooked by the markets. Accepting Bitcoin as a payment alternative means that the firm may choose to liquidate or hold bitcoins upon receiving them. Should they choose not to liquidate, the transaction will be deemed a barter trade and the proceeds will, in turn, be subjected to taxes. The most predictable scenario then becomes — Tesla engages the service of a major exchange, say Coinbase, to liquidate all bitcoins received and deliver automobiles upon receiving dollar proceeds.

So what is so visionary about this initiative, apart from accelerating mass crypto adoption, since the settlement will still be based on fiat currency? According to Chainalysis, the majority of crypto holders are non-U.S. tax residents. Due to rigorous regulatory oversight, these holders find it increasingly challenging to cash out their crypto holdings. Allowing payments in Bitcoin will open up channels for non-U.S. taxpayers to exchange their crypto holdings for U.S. goods and services.

A dilemma then emerges between the U.S. government allowing payments of U.S. goods in Bitcoin and restricting Bitcoin conversion to dollars. The answer is simple: Cash goes everywhere, and it may not necessarily stay within U.S. borders. However, allowing Bitcoin as a legitimate funding method to make transactions in the real world will draw massive Bitcoin treasury into the U.S. and facilitate the consumption of U.S. goods and services. With Tesla spearheading the initiative, it will become the primary channel for non-U.S. taxpayers to cash out their crypto holdings. Gradually, other U.S. companies will follow suit and expand the market available to crypto payment. After all, we are talking about a maturing asset class with a market capitalization that exceeds $2 trillion — too sizable to miss out.

With more stringent KYC and AML measures, the prospect of millions of merchants and service providers accepting cryptos may not be a remote future. If the United States could benefit from the exchange of goods with crypto, will other countries shut the door on accessing huge purchasing power that has the potential to top $10 trillion?

Just think about that.