By now you’ve probably heard about the TESLA Bitcoin investment of $1.5 billion. Why did they invest in Bitcoin? Aren’t they afraid of the volatility and what that means in terms of the company’s profits and losses reports? There is one little detail that everybody seems to be missing.
It is probably one of the reasons why Tеѕlа іѕ іnvеѕtіng into Bіtсоіn and can be a hugе саtаlуѕt іn the future. Tesla has around $19billion in cash and has decided to invest $1.5 into Bitcoin. This is 7.5% of the cash it is worth. A move such as this is only going to make other Fortune 500 companies/brands start thinking about investing into the cryptocurrency market.
Also, there is the probability of Hedge Fund managers fancying their chances about investing in Bitcoin. The reason for this is an assumption which is quite easy to understand – Hedge Fund managers follow the trends in order not to lose clients.
Here is the reality of events
Hedge Fund managers are always under pressure from clients to invest in the trendiest markets. Falling short of expectations simply means your clients are going to withdraw their funds. When this starts happening, you will soon be out of business. The truth is that companies want this kind of exposure to Bitcoin and other cryptocurrencies. There are some things we do know:
The first is that this development makes sense in many regards. For instance, at the ending parts of 2017, Bitcoin searches increased. However, experts have failed to agree with such an increase in searches claiming that it could be for the wrong reasons. There was of course, the belief that the higher the search trends, the more retail investors are searching for a particular stock or cryptocurrency. According to experts, this doesn’t represent any sign of growth in Bitcoin.
Over the past 12months, Bitcoin gained popularity with its value increasing by leaps and bounds. However, experts have a separate view on this. They are of the opinion that such value has been greatly influenced by institutional investors to a great extent. If there is anything to understand here, such is the fact that Bitcoin’s popularity has been put on motion by institutions. Simply put, whatever that represents the boom in Bitcoin at the moment is being driven by retail investors. The question is what will happen when Elon Musk’s Tesla becomes part of this bandwagon? The answer is not far fetched as such can bring about another Bitcoin rally. The implication is that such can cause a rise (in low rate) in search trends.
Although there has been an increase in search trend, such can’t be compared to what happened in the year 2017. According to Archon Invest, the simple reason for this can be traced to the fact that institutions are showing more interest in Bitcoin. Should Elon Musk and Tesla decide to become part of the Bitcoin market, there is every reason to believe it can jump from 10k to 44k. In simple terms, Tesla’s involvement can succeed in driving the Bitcoin price upwards to 50k, 100k or even more. Lots of crypto experts have supported this view and you might just be screwed for betting against it.
The secret of Tesla’s investment revealed
It may interest you to know that we have only succeeded in talking about the search trends and how Tesla’s involvement in Bitcoin can drive its price upwards. Now, it is time to discuss Tesla’s secret which most people don’t know about.
Let’s have a look at Tesla’s SEC report. Few people understand the complicated “lawyer language” (which we also didn’t understand) but after some research, here is the simplified version:
Details contained in the report have explained that such assets would be considered as “indefinite-lived intangible assets”. Thesare what digital assets are being seen or considered as. After a little bit more research, here is what is quite fascinating.
The details about “indefinite-lived intangible assets”
First, when you are trying to understand what indefinite life asset is all about, impairment is something you must do. This is usually whenever your annual or quarterly reports are being filed. If you have read up to this point, there is absolutely no doubt that you must be finding this a little bit complicated to understand. We want this to be as simple as possible for the layman to grasp. Impairment cost is usually grouped under expenses whenever a noncurrent asset’s value is being carried. Don’t forget that Bitcoin is an example of a noncurrent asset.
Here is a simple explanation for better understanding. Impairment cost simply means that the value of an asset is reducing consistently. These could be either tangible or intangible assets. However, in this case, we will be discussing a noncurrent asset which happens to be Bitcoin. Impairment cost will be recorded under expenses when an asset’s book value is more than its recoverable amount which is the current market value.
What does this mean?
After racking our brains for some time, we discovered what it meant. It simply means that should the price of Bitcoin go down due to various market conditions at work, such will not be recorded as loss but as expenses. For instance, remember Tesla was reported at the beginning of this post to have invested $1.5billion in Bitcoin. Now, if the price of Bitcoin reduces thereby making Tesla’s investment in the market to be worth $1.2billion, it means there is a loss of $300million. The thing here is that instead of Tesla recording such a loss, it will be viewed as expenses despite the fact that it is still holding the Bitcoin.
Even if the Bitcoin price experiences a decrease by around 50%, such simply means the $1.5billion dollars will be reduced to $750million. This is a huge loss if you ask any expert. The thing is that this is not going to be recorded as loss but expenses. Instead, there will only be an explanation pointing to negative $750 due to Bitcoin.
The final quarter of 2020 showed that Tesla made a profit of around $369m. If Bitcoin happens to go down by 30% in such a period, it means the losses will be considered as expenses. Assuming Tesla lost 300m worth of Bitcoin, it will appear that $69million profits has been made right?
Although a net income of $69m can be interpreted as poor performance when compared to other trading periods, there is every chance that Tesla’s stock may rise. Simply put, the volatility of Bitcoin can affect Tesla’ stock to a great extent. This is pure genius from Tesla. For instance, the company will pay less taxes due to its report showing less income generated.
Again, if Tesla experiences such loss ($300m) due to Bitcoin as recorded in the expenses section of its report and then generates profits of $400million, details will show that it has only made a profit of $100. You can bet that even the so-called “gurus” on Wall Street are yet to find out how this is happening at the moment.
A profitable scenario
Another instance is when Tesla’s Bitcoin goes back to its original price of $1.5m as explained above. This means that its Bitcoin has gained around $300m. Such is going to reflect in her annual report as income. Even if the company doesn’t generate additional income from sales, people are going to be thinking it has made lots of profits. Don’t forget that no activity has been done apart from Bitcoin prices moving upwards after experiencing a dip earlier on. Such makes Tesla appear very profitable before potential and existing investors. This can help its stock sell off.
Here is the crazy part
Now, assuming that the Bitcoin of Tesla increases by 100%. This means that its Bitcoin will be worth $3billion instead of the initial $1.5billion invested. Normally, you would want to think that Tesla may have to report all of such profits right? Unfortunately, you are completely wrong.
Well, according to the golden rule, additional income is not declared but will only be marked on equity and asset sheets. When losses (no matter the amount) occur, such will be reported as expenses. However, when Bitcoin goes above what has been paid for it, the excess will not be reported.
This is brilliant because whenever Bitcoin reduces, it means the prices of Tesla stock will equally reduce. This gives people the chance of buying such stock at very cheap prices. Also, Tesla isn’t paying taxes on the increase in Bitcoin provided it hasn’t been sold.
Having said the above, it is clear that Tesla has been able to come up with a genius of an idea to play with the mind of stock investors and government agencies. Whether these techniques being used are white hat can only be decided by Wall Street investors. However, it is something other brands will be looking at emulating in no distant time.
Although still many companies are hesitant to invest into cryptocurrencies there is no doubt that digital assets are the future. Having an exposure of around 10% of a company’s portfolio into Bitcoin can yield great opportunities for a company.
After this $1.5 Billion investment from Tesla, we are sure that other big corporations will follow this investment strategy. This may be great news for retail crypto investors because it can drive the price of Bitcoin up.