By Geoffrey Smith
Investing.com -- Tesla’s move to buy $1.5 billion of Bitcoin ought to raise more red flags in financial markets than a Communist Party rally in Beijing. Instead, it’s fuelling a speculative mania in an asset that is trading more feverishly than ever before on the Greater Fool principle.
If Elon Musk wishes to speculate on Bitcoin, of course he’s perfectly entitled to. Lots of other people are doing the same, so there are plenty of reasons to believe that he can sell his Bitcoin on at a profit in future.
But there is no need to do it with Tesla (NASDAQ:TSLA) shareholders’ money. If they want to bet on Bitcoin, there is nothing to stop them doing so. However, Tesla investors have bought - albeit at an excruciatingly high price - rights on the future cash flows of a carmaker.
You can argue that there is no inherent conflict there, and it’s true that there may be a substantial overlap between those who believe in Bitcoin and those who believe in Tesla. Certainly, there appears to be a big overlap in mindset, in as much as both are convinced that both will revolutionize and then dominate their respective spheres in future. The fact remains that Tesla shareholders wanted to speculate on Bitcoin, they have every opportunity to do so themselves without needing Elon Musk to do it for them.
Many Tesla investors will trust any bet that Musk makes, owing to his force of personality. That’s their right, too. Still, now seems as good a moment as any to remind people that Musk is due to face trial in March on charges of breaching his fiduciary duty when he bailed out his cousins’ failing SolarCity business with $5.6 billion of Tesla’s money back in 2016. Tesla's other directors have already paid $60 million plus legal costs to settle those claims.
What Tesla announced on Monday has nothing to do with making or selling electric cars. It is simply a bet on a speculative asset whose only intrinsic utility is to make untraceable transactions in illegal goods and services. The claim that the move is a diversification of its corporate treasury assets is a stretch: the aim of diversification is to spread risk, not magnify it (albeit the risk is small relative to Tesla’s balance sheet: the $1.5 billion spent is less than 10% of the cash held by the company at year-end).
But if the claim of diversification is a stretch, the claim that Tesla will accept Bitcoin as payment for its cars is simply eyewash, as neither the customer nor any company would want to set its prices in a currency that can rise or fall by 10% in a day. Tesla's unit of account will remain the dollar for any meaningful timeframe. The fact that Tesla has resorted to such specious arguments should make one instantly suspicious of its real motivation.
It’s hard to shake the suspicion that the main aim of this move is to generate paper profits out of thin air the way that the company has so far done with emissions credits, which are on a long-term downward trend. Both have the effect of masking the reality that the underlying car business can never be profitable enough to justify the business's current valuation (over 1,700 times trailing earnings and 26 times 2020 sales, in case anyone cares).
The leverage that Musk has over financial markets via his fan base makes it risky to bet against Monday’s move, but it is not a healthy sign for markets in general, and for Tesla in particular.