NEWS, VIEWS & TRUTHS (15/02/21)

Published on: February 15, 2021

Welcome to another Monday edition of News, Views and Truths.  There was some big news last week, so let’s not dally and get straight into it...

A perennial favourite of these pages, Tesla made quite the announcement last week.  Although the headlines focus upon the short-term reaction, the longer-term consequences for not only the market but global business as a whole could be ground-breaking.  

How about that for an intro!

Last Monday, Tesla announced, via a filing with the Securities and Exchange Commission (SEC), that they had bought $1.5 billion Bitcoin for “more flexibility to further diversify and maximise returns on our cash.”  Not only that, but the tech company (yes, they make electric vehicles, but they are also trying to send tourists to the moon so “car company” simply no longer does Tesla the service that they frankly deserve) also confirmed that they will start accepting payments for their products in Bitcoin, making them the first major automaker to do so.

This announcement created a surge in Bitcoin prices, with the current price (at the time of writing, obviously) at $47,025, up just over 60% in 2021 alone.  This means that, since the purchase of the Bitcoin, Tesla’s holding has increased by around $500m; now that’s diversifying and maximising returns on their cash if I’ve ever seen it!

But, as I said, the short-term movement of the price is not the story.  Now that Tesla has allocated corporate cash to the digital currency, this could pave the way for other corporations to do the same.  Ned Segal, Finance Director of social media platform Twitter, has already signalled that his company is considering a similar move, while analysts from Royal Bank of Canada have written a research note on why Apple should consider diversifying its Apple Pay platform to include cryptocurrencies.

Tesla has put almost 8% of its reserves into the cryptocurrency and if Apple, Microsoft, Facebook, Twitter and Google were to do the same, this would translate into almost another US$7 billion investment.  This is less than 1% of the total current worth of the Bitcoin market, but the signal that it would send to other companies and retail investors would likely trigger a bull run that would make the current market look comparably stable.   Some crypto analysts are already predicting that the price will rise to US$100,000 or even US$200,000 before 2021 is out.

And now that Tesla resides within the S&P 500 index, pretty much every investor that holds US equities now has exposure to Bitcoin.  Albeit in a limited form.

It’s not only corporate cash that is being allocated to cryptocurrencies.  The world’s biggest money manager, Blackrock, recently changed a handful of investment mandates to allow some of its funds to invest in the currency.  Investment Manager, VanEck, have recently launched the world first Bitcoin Exchange Traded Fund (ETF), allowing retail investors to invest directly into the crypto without the need to go through the rigmarole of creating digital wallets and trading the asset.

But every silver lining has a cloud (that’s the saying, isn’t it?) and Bitcoin is not immune to the potential downsides.  In fact, I’d suggest that the only thing you can rely upon.

Bitcoin is designed as a peer-to-peer cash system; to work as a currency, it must be stable or be backed by a government. Research clearly shows that the volatility of Bitcoin’s price is extreme and almost 10 times higher than the volatility of major exchange rates (US dollar against the Euro and the Yen). 

As a result of this, for us, this excess volatility adversely affects its potential role in our portfolios and therefore we would not recommend this for inclusion.  But as Tesla has piled in, like it or not, it’s now mainstream and as such, cannot be ignored or written off as a fad.


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Updated: November 2020