Bitcoin Gets A Shot In The Arm

Tesla’s $1.5 billion investment in cryptocurrency will encourage more corporates to gamble with it. Experts say India needs to join before it’s too late

Manu Balachandran

For long, it had only remained the talk of the town. Of course, there were those who jumped on the bandwagon and invested in them, making millions over the past few years. Yet, for many others, bitcoins and cryptocurrencies have remained something of an enigma. Even as bitcoin prices surged to record highs, the lack of a central agency and government regulations meant the digital currency remained somewhat undesirable to many.

All that might change this year. On February 8, Tesla, the world's most valuable automaker, said the company has invested $1.5 billion in bitcoins. It sent the prices of bitcoin up by as much as 15 percent to rise above $44,000. Tesla’s CEO Elon Musk, who was once believed to be the man who invented bitcoins, has been rooting for digital currencies to become mainstream for a while.

“In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity,” Tesla said in a statement on February 8. “As part of the policy, we may invest a portion of such cash in certain specified alternative reserve assets. Thereafter, we invested an aggregate $1.5 billion in bitcoin under this policy.”

The automaker, whose valuation far exceeds the combined valuation of the nine largest car companies globally, is also planning to accept bitcoin as a form of payment for its products in the near future.

“Tesla’s purchase of bitcoins is approximately 0.2 percent of the market capitalisation of bitcoins,” says Sumit Gupta, chief executive officer and co-founder at CoinDCX, a Mumbai-based cryptocurrency exchange. “Tesla’s investment, particularly when it comes from Musk, gives confidence to many in investing in this new asset class. While bitcoins may not be used for trading immediately, they offer an investment opportunity.”

Essentially, bitcoins are digital tokens that are not backed by any physical instruments. They can be sent electronically from one user to another. As of February 9, the market capitalisation of bitcoins stands at $873 billion.

Unlike traditional banking and payment systems, the bitcoin network isn’t carried out by a single company or a central authority. The system is run by a decentralized network of computers around the world, keeping track of every transaction to avoid double-spending. The records of all bitcoin transactions are stored using blockchain technology, a shared public ledger where all the confirmed transactions are included. The integrity and the chronological order of the blockchain are enforced with cryptography.

“Tesla’s purchase of bitcoins appears to be primarily an investment,” says Param Vir Singh, Carnegie Bosch Professor of business technologies and marketing at the Carnegie Mellon University. “The objective of Tesla is to diversify and maximise returns on its cash as the company revealed in its statement to the Securities and Exchange Commission. This investment does legitimize cryptocurrencies and bitcoin, in particular, as a store of value.”

Tesla is among the few companies across the world that have added bitcoin to their treasury; among others is Square, the payments company led by Twitter CEO Jack Dorsey and software firm MicroStrategy Inc. “Tesla has de-risked the acquisition of bitcoin by public companies and accelerated the digital transformation of corporate balance sheets,” Michael Saylor, chairman and CEO of MicroStrategy, said on Twitter. “Treasurers are now thinking about how to convert a non-performing asset into the best performing asset.”

While Tesla’s move is likely to see more corporates take a gamble with bitcoins and other cryptocurrencies, companies, including Microsoft, AT&T, Burger King, Rakuten and BMW, have already begun to accept bitcoins as a payment tool. Last year, PayPal, the largest payment company by market cap in the world, allowed users to buy, hold and sell cryptocurrency directly from their PayPal account.