Hiltzik: What is fueling Tesla’s bitcoin investment?

Whoever rewrote the noticed about where by there’s smoke there is fireplace into “where there’s smoke, there is often a smoke-making machine” (John F. Kennedy often gets the credit rating), there’s small query that just one of the primary smoke-producing machines in American lifetime correct now is Elon Musk.

Think about Musk’s newest vaporous cloud — the announcement on Feb. 8 that his Tesla electrical vehicle company had designed a $1.5-billion investment in the cryptocurrency Bitcoin starting in January.

That’s much more than Tesla has put in on research and development in any of the previous three decades.

The announcement helped mail the selling price of Bitcoin up by as significantly as 25% in a working day, although it appeared to have the opposite influence on Tesla shares, which have missing about 4% considering that then. Bitcoin achieved a history $47,698 on Feb. 8 prior to falling back again to about $45,000 by midweek, in accordance to Coinbase.

The complete episode adds just far more muddle to the enduring query of irrespective of whether Tesla is grossly overvalued, primarily given that it has but to change a web income from promoting automobiles.

The company’s market capitalization of $780 billion significantly outstrips the merged valuation of Common Motors and Ford (about $125 billion), even however Tesla bought 500,000 automobiles past yr and the other two businesses much more than 10 million, put together.

Tesla’s Bitcoin announcement happened to coincide with a pair of doses of poor information for the corporation.

One was a Feb. 6 report in the Worldwide Occasions, an English-language publication of the Chinese Communist Occasion, that the Chinese authorities experienced upbraided Tesla for lapses in good quality control and purchaser relations in China. Which is a issue because Tesla has appreciated a incredibly favorable romance with the Chinese government, so far.

“Tesla has revealed respect for the probable of the Chinese sector, but not the exact stage of regard is given to Chinese consumers,” the publication noted, citing “analysts.”

The 2nd was a report from German sources that the company’s German motor vehicle and battery factories were being struggling with months of development delays, as very well as diminished government subsidies for the battery plant.

Musk, who has been accustomed to investors’ purchasing into his enthusiasms and boosting Tesla’s stock selling price, may perhaps have appreciated the extent to which commentary about Tesla centered on its Bitcoin journey fairly than its ground-amount difficulties with Chinese regulators and European development.

When items are going nicely, Musk promotes the very good news relentlessly. When they are heading not so nicely, there are loads of sideshows in the offing to distract followers from Tesla’s base line.

In new yrs, these sideshows have included Musk’s public toying with having Tesla private, an journey that yielded a punitive reaction from the Securities and Exchange Fee Musk’s war with short-sellers his advertising of flamethrowers and his community spat with a rescue qualified who had dismissed Musk’s work to aid save a group of Thai pupils trapped in a cave.

The most constant misdirection Tesla engages in applies to its disclosures of earnings. On the surface, these have been a shiny place.

In reality, in pretty much every quarter and in the course of 2020, Tesla’s profits have been dependent on the gross sales of regulatory credits to other companies — without the need of them, Tesla would have been in the purple. Very last yr, for example, Tesla claimed $721 million in internet earnings and product sales of regulatory credits, which are pure gain, of $1.6 billion.

The most bewildering factor of Tesla’s Bitcoin financial investment is the risk it poses to Tesla’s revenue-and-reduction assertion. In disclosing the expense, Tesla said its Bitcoin would be carried on its textbooks as “indefinite-lived intangible belongings.”

According to accounting guidelines, individuals property must be evaluated just about every quarter Tesla will have to report a reduction any time the price of its Bitcoin falls under its order value. But Tesla isn’t permitted to figure out a obtain, even if the price tag rises, except if and right up until it sells its Bitcoin.

Definitely, this unbalances the Bitcoin accounting towards a reduction. If Bitcoin rises, Tesla could promote its Bitcoin at any time and realize the obtain.

But presented how significantly Bitcoin rose on the news that Elon Musk experienced bought in, can you picture how considerably it may drop on the news that “Elon Musk is marketing his Bitcoin”? To put it an additional way, Tesla’s expense may possibly be virtually as significantly of a hazard for Bitcoin holders as it is for Tesla Bitcoin admirers superior pray that Musk doesn’t great on the crypto.

The other factor of Tesla’s announcement that aided gas Bitcoin’s rise was the suggestion that Tesla could start accepting Bitcoin as payment for its cars and trucks “in the in the vicinity of long run,” albeit “initially on a constrained foundation.”

That spurred a surge of speculation about no matter whether Tesla’s final decision may set the stage for broader industrial acceptance of Bitcoin as payment for products and services. The common summary among gurus is that it won’t, for quite a few reasons.

For 1 detail, transaction costs for converting currencies into and out of Bitcoin can be steep, creating the cryptocurrency uneconomical for small purchases.

In addition, Bitcoin is so hellishly unstable that merchants just can’t be sure from a person second to the upcoming what it’s worthy of, and as a result how considerably they’ve bought their merchandise for — Bitcoin can slide or rise by 20% in a issue of hours.

Tesla acknowledged that fact by disclosing that the Bitcoin it acquired for its autos “we may or could not liquidate on receipt.” That also suggests that the company doesn’t automatically plan to make up its hoard of Bitcoin by keeping on to no matter what it gets from buyers.

Musk’s clear fascination with Bitcoin is also perplexing. As my colleague Russ Mitchell pointed out adhering to the company’s financial commitment disclosure, Bitcoin is an odd expenditure for a enterprise that presents by itself as an ecological hero since the cryptocurrency is the antithesis of a “green” commodity.

“Mining” Bitcoin — the strictly managed system by which the source of Bitcoin is augmented — demands electric power on an enormous scale to run the personal computers associated. As Mitchell reported, cryptocurrency mining made emissions of carbon dioxide equal to that generated by extra than 4 million gasoline-powered automobiles a calendar year.

In other terms, what Elon Musk is providing the entire world by creating electrical vehicles, he’s serving to to just take absent by taking part in the Bitcoin ecosystem.

The remaining mystery is what Musk really thinks about Bitcoin and other cryptocurrency. He has often portrayed himself as an fanatic of the strategy, which tracks with his persona as an entrepreneurial iconoclast.

But he has also been dismissive, as he was as recently as Dec. 20, when he tweeted, “Bitcoin is almost as bs as fiat money.” His reference was to central-lender-connected currencies, which Bitcoin supporters usually denigrate as fiat revenue due to the fact their supply can be expanded or shrunk as governments would like.

Hardly a month later, Tesla was leaping into the pool.