Tesla's controversial investment
By Louise Mulliez, Research Analyst at King's Global Markets
Early February, the electric vehicle manufacturer revealed a $1.5 billion investment in bitcoin in a Securities and Exchange Commission filing, representing about a tenth of the company's cash reserves. This investment is aimed at providing the company with greater flexibility to further diversify the forms of payment for its products, while maximising its cash returns.
For reference, bitcoin is known for being the world's largest digital cryptocurrency, but also for its main drawback — its extreme volatility. In this regard, Tesla is exposing itself to the massive risks associated with the nature of bitcoin's value. Indeed, since the founder Elon Musk invested in the digital asset, the price of bitcoin has soared by more than 500%, from less than $4,000 in March 2020 to almost $60,000 last week.
Source: Yahoo Finance, last updated on 19/03/2021 at 10:58 GMT
Daniel Ives, an analyst at Wedbush, pointed out the striking contrast between Tesla’s 2020 profits generated from its core business compared to the estimated total surplus from bitcoin purchases, namely $721 million versus about $1 billion, respectively. This means that the company faces the threat of having its annual profits wiped out by bitcoin's volatility, not to mention that this investment represents the equivalent of the company's entire research and development budget.
Consequently, Tesla's purchase of bitcoins has not only shaken up the company's business model, but also its environmental credentials. Indeed, the electric vehicle company's famous mission statement is to "accelerate the world's transition to sustainable energy". Similarly, its near-perfect environmental, social and governance (ESG) score from MSCI underlines the company's commitment to clean energy. However, the virtual generation of the digital currency is dangerously affecting the real world. Indeed, the process is performed by high-performance computers in competition with other devices to solve complex mathematical puzzles that relies on fossil fuels such as coal — the worst of all.
According to Cambridge, bitcoin's energy consumption has increased by 80% since the beginning of 2020, accounting for 0.59% of the world's total energy consumption, causing more pollution than one entire small country each year. The company's investment, along with Elon Musk's pro-bitcoin tweets, only makes the situation worse, as the rising price of bitcoin encourages more miners to connect to the network and thus impact these figures.
As a result, the mining process of bitcoin is at odds with the company's values and has raised many criticisms among stakeholders. This is the case of Ben Dear, CEO of Osmosis Investment Management, a sustainable investor who holds Tesla shares in several portfolios and has expressed deep concerns about the environmental impact: according to Bank of America, an investment of $1.5 billion in bitcoins has the equivalent carbon footprint of the annual emissions of 1.8 million cars.
This news certainly leads to many people questioning Tesla's governance and its role in the portfolio. Nevertheless, could this move influence other large companies in the cryptocurrency market and thus encourage the production of "green bitcoins" with renewable energy in the near future?
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