- Tesla is the second-largest bitcoin owner despite its concerns over the climate impact from the mining process.
- Digital assets, including established ones like bitcoin, are highly volatile over the short-term.
- Six experts told Insider why bitcoin investments expose major risks to corporate investors.
Tesla holds 43,200 bitcoins, currently worth about $1.52 billion, according to bitcointreasuries.org. This makes the electric vehicle maker the second-largest corporate bitcoin owner after technology firm MicroStrategy.
The cryptocurrency market was spooked in recent weeks by a combination of Elon Musk suspending bitcoin payments, China banning financial institutions from maintaining crypto practices, and Japan’s central bank governor warning about its volatility.
Tesla’s announcement in February that it had poured $1.5 billion into the digital asset excited investors initially, but the recent volatility in bitcoin highlights risks to shareholders. Some question whether Tesla’s purchase was a good use of corporate cash.
Six experts told Insider why companies, including Tesla, can’t rely on cryptocurrencies as sound corporate cash investments.
Risk to investor protection duty
“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 if your ‘cash’ (bitcoin holdings) is fluctuating as much as 10% in a day?” – Marc Lichtenfeld, chief income strategist at The Oxford Club
“While some investment strategies recommend a small percentage (2%-5%) of the total portfolio for investment purposes, we are a long way from using cryptos for transaction purposes, and so is not a recommended Treasury management strategy. It is possible that in the future cryptos are accepted as a trade currency similar to fiat and that will reduce ‘volatility’ and enable hedging vs fiat currency for better cash management.” – Sankar Krishnan, executive vice president, Capital Markets and Banking at Capgemini.
‘All the downside, none of the upside’
“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. So they get all the downside, and none of the upside.” – Jerry Klein, managing director at investment firm Treasury Partners
“A great corporate treasurer understands that when you have one of the world’s highest returning assets which is also showing high volatility, you need to analyze how to fit it in. Throwing out the baby with the bathwater never makes sense.” – Matthew Le Merle, managing partner of Blockchain Coinvestors
“Bitcoin and other cryptocurrencies are not legal tender. They are not issued by central banks, and as such their volatility is easily susceptible to speculation and pricing manipulation.” – Felix Shipkevich, special professor of law at Hofstra University
“The crypto market might be here to stay, but my suspicion is like the metamorphosis of a caterpillar to a butterfly, the stability of the crypto market is not here yet. Until that happens, a company investing and taking a long-term position in an unregulated market instrument like cryptocurrencies can not receive my endorsement.” – Sam Onigbanjo, a founding partner of the Capital Markets Academy, London