Tesla’s $1.5 Billion Bet on Bitcoin Went Exactly as You Might Have Expected–Not Good

Last week, Tesla announced its most recent quarterly earnings. For the most part, they were what you might expect. The company still keeps making a lot of cars, which means its revenue is up compared to a year ago, but challenges like supply chain disruptions and COVID-19 are making things difficult. That part is true for pretty much every business right now.  

Of course, this is Tesla, which means that in addition to the usual talk about revenue and expenses, we got to hear from Elon Musk, who is both the world’s richest person, and also the world’s most unpredictable public-company CEO. 

For example, you might remember that last year Tesla spent $1.5 billion to buy Bitcoin, and announced it would accept payment for its electric vehicles in the cryptocurrency. That was surprising, on the one hand, since carmakers don’t usually put that much cash into speculative assets like cryptocurrency, but it was also not terribly shocking considering that Musk has been one of crypto’s biggest one-man hype machines. 

At the time, I wrote that this seemed generally like a bad idea. First, it seems weird that Tesla, which makes electric cars because it believes they are better for the environment, would buy or accept Bitcoin, which has to be mined–a process that currently requires twice the entire electrical consumption of Switzerland. 

The company later walked back the part about letting you pay for a new Model 3 with Bitcoin after Musk apparently realized just how much energy it consumes. Again, he’s unpredictable.

Second, I suggested that the volatility of Bitcoin made it less than ideal for a capital intensive business like building cars. There are certainly a lot better things Tesla could do with that $1.5 billion. It turns out I was right, at least on the latter point.

In its letter to shareholders, Tesla mentioned that it had converted 75 percent of its Bitcoin holdings into fiat currency, or, cash. The reason is exactly what you might think: “The reason we sold a bunch of our bitcoin holdings was that we were uncertain as to when the COVID lockdowns in China would alleviate so it was important for us to maximize our cash position.” Musk said. 

It’s not surprising that all of the companies Tesla does business with want to get paid–in U.S. dollars, for the most part. Holding a bunch of Bitcoin on your balance sheet isn’t all that useful, especially when it keeps losing value. 

I’m sure that when Tesla bought its massive collection of shiny Bitcoins, the company was betting (like a lot of people) that its value would continue to go up. And, it did for a while. In that case, it would have looked like a great bet. 

When Tesla was acquiring Bitcoin, it was valued somewhere around $35,000 (Tesla never disclosed exactly what price it paid). It later peaked in October a little above $61,000. That certainly looks like a good bet. The problem with bets is that sometimes they go bad. 

Since October, Bitcoin has lost two thirds of its value. That represents a lot of cash Tesla could have used for things that actually make it money–like buying components and building cars.

To be clear, Musk says that Tesla’s unwinding of its Bitcoin “should be not taken as some verdict on Bitcoin.” He even made sure to point out that Tesla had not sold any of its Dogecoin. 

Still, it’s hard to see this move as an endorsement. What good is a currency if it’s not a store of value that can be used to fund operations? More importantly, why would a business want to convert cash–something that can always be used to fund operations, into what is mostly a speculative asset, and a volatile one at that?

It’s hard to see that ever ending well. To the contrary, that seems like something almost anyone could have predicted.