Bitcoin surged 15% on Monday, February 8, 2021, following an announcement by the company that had made a significant investment in cryptocurrency. According to Tesla, the company is poised to begin accepting payments on their electric cars in bitcoin. The bitcoin rallied sharply in CFD trading on the news and rallied above $46,000 per bitcoin. Elon Musk, the founder and CEO of Tesla, has always been a fan of deregulated currencies,
What Happened
Tesla Inc announced that the company had invested around $1.5 billion in bitcoin and expected to accept payment for its cars and other products in bitcoin soon. The goal was to make the company liquid with bitcoin, which generated a robust rally in the digital currency.
Will Tesla accept Bitcoin as a Payment Method?
If Tesla were to accept bitcoin payments, customers would likely have to convert their bitcoin into cash instead of transferring their bitcoin from their digital wallets to a Tesla digital wallet, according to sources. Another entity would likely need to be involved in converting cryptocurrency into dollars and sends those dollars to Tesla. For example, companies including AT&T and Microsoft Corp have accepted bitcoin through BitPay, a cryptocurrency payment processor. Some believe that Tesla may eliminate the middle man and create a processing system that can buy bitcoin and liquidate the payments whenever management chooses to. While this may be the case, it would be unusual given the volatility of bitcoin. PayPal Holdings, which expects to allow cryptocurrencies on its network by mid-year, will settle transactions through Paxos Trust Company. Using a payment processor would mean that neither the merchant nor PayPal will hold the virtual coins. If Tesla goes that route, and begins to accept bitcoin directly, the company will probably have to set a guaranteed exchange rate with customers for a concise period.
Having exposure to bitcoin could generate a significant change in revenues due to the volatility of bitcoin. In 2021, the underlying historical volatility of bitcoin is more than 110% annualized. This movement in the price of bitcoin is up from approximately 40% in November of 2020. Historical volatility of 100% means that the cryptocurrency would move by 100% from its current level over the next year. T daily movements are so volatile 365 days, the value of the digital coin in U.S. dollars is likely to be $90,000 or zero given current levels of historical volatility. With more than 1.5 billion in bitcoin investment dollars, Tesla is taking a considerable risk on a digital coin.
How Should Tesla Be Valued?
With such a large investment in bitcoin, whether the company will fluctuate with the value of bitcoin? Will Tesla be viewed as a payments company like Square and PayPal? Will it begin to be valued with a new financial model by the analyst community?
Will There be New Oversight?
If Telsa decides to take bitcoin directly, itis opening it up to fresh regulatory scrutiny. Further, regulators could perceive that the company is trying to replace the U.S. dollar by accepting bitcoin as payment for its cars.
The Bottom Line Tesla has decided on investing in bitcoin. There are likely many reasons, but the company’s announcement depicts the company poised to begin to accept payments in bitcoin. The question for investors is whether Tesla will become a payments processor and buy bitcoin directly? Or will the company use a payments processor and have that intermediary convert bitcoins into dollars or other sovereign currencies before transferring money to Tesla. Regardless of how Tesla accepts payments in the future, the company has made a considerable cash investment. Elon Musk invented Paypal and appears to be on the cusp of creating a new entity.
