Counting Coins: Tesla sends Bitcoin to Record High with $1.5bn Investment

February 21, 2021


3 min read

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What's going on here?

Tesla gave Bitcoin its most significant corporate endorsement to date with a $1.5bn investment in the world’s most popular cryptocurrency. The rise extends a rally in the volatile digital asset that delivered over 300% gains in 2020.

What does this mean?

On Monday 8 February 2020, the electric car company run by the world’s richest man (Elon Musk) bought $1.5bn in Bitcoin. News of Tesla’s investment sent the digital currency soaring more than 10% to a record high of $44,100. It extends a 50% surge in 2021. After quadrupling in value last year, Bitcoin has kicked off 2021 right where it left off. Tesla has also announced plans to accept payments for its electric cars in Bitcoin in the future. Amid the doom and gloom of the pandemic, Bitcoin’s appeal (and value) has been rocketing. 

However, the rally has not been plain sailing. At the end of January 2021, Bitcoin’s stratospheric rise faltered by a drop of 25%. These highs and dips are characteristic of Bitcoin’s rollercoaster ride as an asset class. The latest rally has fuelled concerns that Bitcoin is approaching a bubble. A bubble is a situation in which asset valuations rely on implausible views of the future. Typically, it involves a surge in asset prices followed by a market crash, of which experts are anticipating a long-overdue one for Bitcoin.

An example of a bubble bursting is Bitcoin’s last rally three years ago. In 2017, Bitcoin jumped from $1,000 to $19,000 before tumbling down to $4,000 at the end of 2018. In this light, economist Nouriel Roubini has called Bitcoin “a speculative asset and bubble with no fundamental value”.

What's the big picture effect?

Tesla is the latest consumer-facing company to venture into cryptocurrency markets – following Paypal (see our article on that here). The main driver of Bitcoin’s latest rally has been the institutional adoption of cryptocurrency. In December, UK-based asset manager Ruffer said it accumulated ÂŁ550m in Bitcoin as a hedge to risks in a “fragile monetary system and distorted financial market”. Ruffer’s move seemed to signal the start of a portfolio diversification trend into Bitcoin. In other words, there is growing confidence Bitcoin is joining the mainstream – further supported by Tesla’s latest investment.

But what is the appeal of Bitcoin to Tesla or financial institutions? Investors view Bitcoin as a hedge against inflation and an alternative to the depreciating US dollar. As central banks continue to print money to fund pandemic stimulus packages, demand for Bitcoin has soared. The supply of Bitcoin in existence is limited – only 21m digital coins will ever exist. An increase in the supply of traditional money by central banks means demand for Bitcoin will exceed supply. The asset’s scarcity value relative to cash rises. As we continue to wrestle with the virus, there could be more room for Bitcoin to climb.

Some of Bitcoin’s ardent supporters argue that the asset could even supplant gold as a store of value. Gold, which also serves as a hedge against inflation, made impressive 25% gains in 2020 – but far less than Bitcoin’s 300%. Analysts at JP Morgan Chase believe that Bitcoin is now drawing institutional capital away from gold. This trend is likely to continue as millennials become a more significant part of the investment market. In a recent Forbes survey, only 3% of baby boomers said they own a cryptocurrency, compared with 27% of millennials. Their preference for “digital gold” is likely to exacerbate Bitcoin’s rise.

However, there is a need for caution. Bitcoin’s greatest weakness is its intrinsic volatility: its daily price swings are still four times larger than gold. This volatility remains the asset’s largest barrier to wider public adoption – especially as a form of payment. But Tesla’s decision to accept payment for its electric cars in Bitcoin could change this. If Elon Musk can overcome this limitation, it could enable Tesla to access a wealthy market of Bitcoin speculators. Multiple brands are beginning to accept Bitcoin as a form of payment. But with Tesla’s seal of approval, this trend could accelerate. Other investors and industry leaders will be watching the cryptocurrency market closely.

From a trading or asset perspective, Bitcoin’s volatility is now a window into the financial system. As central banks continue to fund the recovery, Bitcoin’s price serves as a measure of inflationary pressures. Whether this benefit is enough to sustain the asset’s current hyper valuations remains unclear. Is this market mania or the birth of the new gold?

Report written by Deniyi Coker

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