In its second-quarter results report published on Wednesday evening, Tesla stated that it has sold 75% of its bitcoin assets for a total of $US936 million ($1353). The business stated that it was maximizing its cash position in light of the uncertainty surrounding Covid in China.
The corporation startled the financial markets by purchasing $US1.5 billion worth of bitcoin at that time, claiming in a filing that it believed in the "long-term potential" of cryptocurrencies as an investment and a liquid alternative to cash. The decision, however, comes approximately 18 months later.
The price of bitcoin then surged to an all-time high of over $US68,980 in November before collapsing to a 2022 low of almost $US17,600 last month.
What Tesla's massive bitcoin sale means for the future of crypto?
Tesla's endorsement propelled bitcoin's price surge in 2021 as new and existing investors rallied around the hypothesis that it would encourage other businesses to purchase cryptocurrencies as part of their corporate treasury management. According to Cathie Wood's Ark Invest, the price of bitcoin would increase by more than $US40,000 if just 1% of the corporate cash held by each S&P 500 company were converted into bitcoin; if 10% of corporate cash were converted by each company, a reasonable price prediction for bitcoin was $US400,000.
With Tesla's change of direction, the notion seems even more improbable.
Nevertheless, a lot of investors are not alarmed by Tesla's choice. They assert that the company made the decision that was best for it in the short term given the "very terrible" economics that chief executive Mr. Musk has described. According to these investors, bitcoin is bigger than Tesla or its well-known CEO, and its long-term use case as an inflation hedge still holds up.
Additionally, they point out that even after Tesla's statement, bitcoin kept its gains from this week.
Leah Wald, co-founder and CEO of digital asset fund manager Valkyrie Investments, said: "Such a significant amount of bitcoin was sold and the market was not only able to handle it from a liquidity perspective, but we even saw a rally and price support around the key psychological barrier of $US20,000." "The long-term view is remains promising, particularly when you take into account all the investments being put into the infrastructure for digital assets."
Investment asset vs cash alternative
Tesla announced it would start taking bitcoin as a form of payment when it purchased bitcoin in February 2021. (which it nixed three months later).
The announcement contrasted with the fervent sermons on bitcoin's long-term potential given by Microstrategy CEO Michael Saylor and Block CEO Jack Dorsey. The ability of bitcoin to be bought, sold, and moved around with ease piqued Tesla's curiosity.
According to Noah Hamman, CEO of AdvisorShares, which oversees the AdvisorShares Managed Bitcoin Strategy ETF, "there are fundamental disparities in how and why people were deciding to hold bitcoin on a balance sheet, it's reflective of the rest of the crypto industry."
"Some people are steadfast and unwavering in their beliefs. However, a lot of individuals, perhaps the majority of people, will have a more transactional mindset and wish to control their risk when holding something as volatile as [bitcoin].
Wall Street analysts praised Tesla's decision on Thursday, noting that the EV manufacturer's shares had inherited the volatility of bitcoin.
Although management stated that it is still open to holding bitcoin, the sale should boost sentiment because historically, bitcoin volatility has had a negative impact on TSLA shares, according to Baird's Ben Kallo on Thursday.
The COO and co-founder of Bitcoin IRA, Chris Kline, stated that some companies with high cash flow requirements may have more flexibility over the long run than others.
This story has just started, he said. Diversification of the balance sheet will be a must going forward for businesses as we engage in a more extensive currency discourse. In uncertain times, especially, businesses prefer liquidity. For Tesla in this use case, Bitcoin met this need.
Mr. Hamman feels there is a more important component at work and that Tesla's announcement will have "not really much of an influence at all, or perhaps a good impact."
According to Mr. Hamman, "Regulation is coming and depending on how that looks, it could really foster the value of what blockchain and bitcoin can be, but it could also really dampen it if the rules and regulations that start to come are overly aggressive or take away from the value and benefit that bitcoin and blockchain should bring."