Bitcoin is crashing. Everybody knows that right about now, and the world’s number one digital currency has fallen to around $34,000 per unit at the time of writing. The currency has lost roughly $30,000 from its previous all-time high of $64,000, which it attained in mid-April, and many are wondering if companies such as Tesla – which purchased a lot of BTC about three months ago – did the right thing with their money.
Did Tesla Do the Right Thing Regarding Bitcoin?
Tesla made headlines in February when it announced that it had added approximately $1.5 billion in BTC to its balance sheet. This got everybody talking and many crypto fans around the world thought that the digital asset was going to enter mainstream territory once and for all. Now that the price of bitcoin has fallen to unprecedented levels, many are wondering if Tesla and other institutions behaved correctly.
As it stands, Tesla is the institution with the second largest amount of bitcoin to its name, the first being software firm MicroStrategy. Many analysts and financial experts out there say that these firms made poor choices when it came to the use of corporate money, as in purchasing bitcoin, as they inherently created more risk for their shareholders.
Marc Lichtenfield – chief income strategist for the Oxford Club – was particularly critical of Tesla’s moves, claiming:
Companies that hold large amounts of their cash in bitcoin are breaching their fiduciary duties to shareholders, plain and simple. If an investor wants exposure to bitcoin, he or she should buy bitcoin. Corporate cash should be used for funding growth and/or returning capital to shareholders. How can you plan to fund those initiatives when your ‘cash’ (bitcoin holdings) is fluctuating as much as ten percent in a single day?
Sankar Krishnan – executive vice president of capital markets and banking at Capgemini – said that bitcoin is nowhere near the point of being used as a widespread payment method, which is what it was initially designed for. Thus, owning excess amounts of it does not prove to be a useful strategy. He says:
While some investment strategies recommend a small percentage (two percent to five percent) of the total portfolio for investment purposes, we are a long way from using cryptos for transaction purposes, and so it is not a recommended Treasury management strategy. It is possible that in the future, cryptos are accepted as a trade currency similar with fiat and that will reduce ‘volatility’ and enable hedging vs. fiat currency for better cash management.
Not Enough Upside
Jerry Klein – managing director of investment firm Treasury Partners – was also critical, saying:
Bitcoin is treated as an intangible asset, which means that the declines in value of bitcoin have to be written down and taken as a hit to earnings. Unfortunately for these companies, increases in the value of bitcoin do not flow back into earnings.