Bitcoin soars after Elon Musk's Tesla buys US$1.5b of digital coin, plans to accept as payment for its cars

At current prices, 0.88 bitcoins would be enough to buy an entry-level Tesla Model 3.
At current prices, 0.88 bitcoins would be enough to buy an entry-level Tesla Model 3.PHOTO: EPA-EFE

NEW YORK (REUTERS) - Bitcoin took another large stride towards mainstream acceptance on Monday (Feb 8) after Elon Musk's Tesla revealed it had bought US$1.5 billion (S$2 billion) of the cryptocurrency and would soon accept it as a form of payment for its electric cars.

The announcements, buried deep in Tesla's 2020 annual report, drove a roughly 20 per cent surge in the world's most widely held cryptocurrency to over US$47,000. At current prices, 0.8 bitcoins would be enough to buy an entry-level Tesla Model 3.

Investors anticipated other companies will soon join a list of firms that invest in or hold bitcoin including BlackRock, the world's largest asset manager, and payments companies Square and PayPal.

Mr Elon Musk has upended Wall Street over the last year and briefly became the world's richest person as shares of Tesla surged nearly 500 per cent to become the fifth most-valuable US company, leaving other companies and investors eager to follow in his wake.

"If any lesser mortals had made the decision to put part of their balance sheet in Bitcoin, I don't think it would have been taken seriously," said Thomas Hayes, managing member at Great Hill Capital. "But when the richest man in the world does it, everyone has to take a second look."

The news sparked heavy trading in cryptocurrencies and caused exchanges like Coinbase, Gemini, Binance to experience technical issues, according to Coindesk.

It also generated discussion on Reddit. While discussions of cryptocurrencies are banned on the WallStreetBets community that fueled the GameStop Corp trading frenzy, users in other subreddits posted "to the moon," expecting more companies to follow suit after Tesla.

Some report exchanges including Binance and Kraken were having issues trading, while other also raised the question of whether Mr Musk has been pumping the price of bitcoin while making a major investment in the cryptocurrency.

A well-known supporter of cryptocurrencies, Mr Musk has weighed in regularly on the past month's frenzy in retail investment, also driving up prices of the meme-based digital currency dogecoin and shares of US video game chain GameStop.

He said a week ago that bitcoin was "on the verge" of being more widely accepted among investors, and in December asked if it was possible to do large transactions in the currency.

In late January, Mr Musk changed the bio of his Twitter account, which has 46 million followers, to include #bitcoin.

Tesla said in a filing the decision to move nearly 8 per cent of its reserves into bitcoin was part of its broad investment policy as a company aimed at diversifying and maximizing its returns on cash, including holding gold. The report said it ended 2020 with US$19.38 billion in cash and cash equivalents.

"We expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt," the company said.

Tesla said it had invested an aggregate US$1.5 billion in bitcoin under the changed policy and could "acquire and hold digital assets from time to time or long-term". Shares of the company rose 1.5 per cent on Monday.

Gold jumped more than 1 per cent while ethereum, another cryptocurrency, surged to a record high.

Long-term Store Of Value?

Central banks remain skeptical of digital currencies, but analysts say the more real world uses appear for bitcoin, the more attractive it will prove as a long-term store of value.

Bitcoin surged nearly 14 per cent to a record high of US$43,625 after Tesla's disclosure.

"The argument for bitcoin is evolving. It used to be negative (reasons to buy), but suddenly there are positive reasons, and that's why you see bitcoin at (new highs)," Mohamed El-Erian, chief economic advisor of Allianz, told CNBC.

Tesla is the latest company to add bitcoin to its corporate treasury, following similar moves by Square, the payments company led by Twitter Inc chief Jack Dorsey and US software firm MicroStrategy Inc.

Apple may be the next big company to enter the cryptocurrency market, both by allowing bitcoin to be exchanged on its Apple Wallet service and investing some of its own reserves in units of the cryptocurrency, said Mitch Steves, an analyst at RBC Capital Markets.

"We think the firm could immediately gain market share and disrupt the industry" by allowing bitcoin exchange, while also pushing the price of bitcoin higher, he said.

PayPal said in October it would allow customers to buy, sell and hold bitcoin and other virtual coins using its online wallets. It remains to be seen whether bitcoin will see greater adoption as a form of payment, something that it has traditionally struggled to achieve.

"If this becomes a trend in corporate treasuries the downside of staying on the sidelines will only become costlier over time," said Maya Zehavi, a blockchain consultant. Musk has also endorsed other cryptocurrencies. He gave dogecoin, the coin based on a popular internet meme, a shoutout on Twitter last week, sending its price to record highs over the weekend.

Tesla's move to put some of its corporate reserves in bitcoin may be a signal that it expects the cryptocurrency will emerge as another store of long-term value alongside the dollar and gold, said Graham Tanaka, president and chief investment officer of Tanaka Capital Management in New York.

"Companies are very careful when it comes down to their reserves," he said. "This doesn't appear to be a flash in the pan. It appears to be something that may be a fundamental change."