In early 2021, Elon Musk bestowed the landmark endorsement that, more than any other high-profile purchase, sent Bitcoin on a moonshot and clinched its status as a mainstream investment. Musk famously purchased $1.5 billion in the king of cryptocurrencies using spare cash on the EV maker’s balance sheet, a highly unorthodox move since most companies abhor putting their war chests at risk. In public statements, Musk and CFO Zach Kirkhorn expressed great pride in pioneering a new practice of wagering to make big money on dollars virtually every other enterprise just wants to keep safe. Kirkhorn declared on last year’s Q1 conference call that the purpose was to “get some return” on cash “not immediately being used for operations.” In a SEC filing weeks earlier, Kirkhorn went so far as adding a second title to his rank as CFO: “Master of Coin.”
But so far, the grand experiment’s proved a bust. On the morning of May 11, Bitcoin dropped below $29,400, erasing all of Musk’s once-sumptuous gains, and though it rebounded later in the day, it’s now hovering near the break-even point. Let’s review how Musk’s bet took shareholders on a roller-coaster ride so wild that it left them dizzy not from awe but dread, yet went nowhere.
Musk’s crazy Bitcoin ride
Between Jan. 1 and Feb. 8 of 2021, Tesla bought approximately 46,700 Bitcoin for its corporate treasury, at an average price of roughly $32,500. By the close of Q1, Tesla had sold one-tenth of its coins to test Bitcoin’s liquidity, stating its satisfaction at quickly off-loading the stake in a highly active market. Musk’s timing was quicksilver: Tesla got a price of $58,000, collecting $271 million on shares that had cost $143 million just a few weeks before, for a gain of $128 million. That left Tesla holding a stock of 42,000 Bitcoin, the exact number it owns to this day.
By March 31 of last year, Tesla had amassed total realized and unrealized “gains” of $1.1 billion, measured by the profit on the 10% sale plus the appreciation in the balance it still owned. By early November, that figure had grown to $1.5 billion, a 100% return on its purchase and equivalent to two-thirds of its pretax profits in the fourth quarter, excluding sales of regulatory credits. From there, Bitcoin mainly hurtled downhill while bouncing along the way. In June, it fell into the high $20,000s, sending Tesla’s investment negative. After rebounding briefly into the high $40,000s in late March, it plummeted in the tech downdraft, falling below $30,000 on May 11 to its lowest levels since last summer.
Bitcoin’s fall canceled Musk’s once-spectacular winnings
Of course, the mark Tesla must beat to make money is the $1.5 billion it invested 15 months ago. Keep in mind that the special accounting treatment for Bitcoin is complicated. It’s officially classified as “an indefinite-lived intangible asset.” Under that definition, If the prevailing market price for coins at any time during a quarter falls below what the company paid for any of the Bitcoin on its balance sheet, the company must take a write-down or “impairment” charge on those coins—even it doesn’t sell any. What matters most to shareholders is the cash Tesla paid versus the cash it has collected and could collect if it unloaded the trove on its balance sheet.
Here’s the math. Once again, Tesla banked $271 million in the 10% sale in Q1 of last year. If it sold the 42,000 coins still on its balance sheet at the $29,360 price reached on May 11, it would pocket another $1.23 billion. The total cash “proceeds” would equal precisely the original outlay of $1.5 billion. Tesla has already written down part of its holdings that reduce its cost “basis,” which as of Dec. 31 stood at $30,000 per coin. At $29,360 the Bitcoin it’s holding hence is worth less than the “carrying value” of those coins. Tesla clearly paid far more for many of the coins on its balance sheet than the the sub-$30,000 price recorded on May 11. So it will face more impairments in Q2 that will reduce reported earnings. That will be a minor hit, but on top of the Shanghai plant’s shutdown and the plunge in Tesla’s share price following Musk’s Twitter foray, it’s more worrisome news that shareholders don’t need.
What’s so bad about just breaking even? The typical company would have gotten puny returns on super-short-term notes in the period Tesla made its roundtrip in Bitcoin. The difference is that responsible enterprises accept low yields on corporate cash in return for ironclad security. Musk parked a big chunk of Tesla’s nest egg in the riskiest of risk assets, yet made nothing. Musk still courts grave danger by keeping so much Bitcoin. He should dump it now while Tesla can still escape with its investment intact. If Bitcoin falls below $20,000, Tesla would face an accounting loss approaching $500 million. Elon Musk wouldn’t drive a Tesla after downing three martinis. Yet on his Bitcoin joyride, the merry prankster’s got no more control than a drunk at the wheel. The bold drive that helped make Bitcoin respectable may be veering toward a mangled crash.
