Tesla Buys $1.5b Bitcoin – Why?
Bitcoin’s price exploded last night and took most other crypto’s with it. Almost hitting US$44,000 or AU$57,000 earlier this morning, the price is sticking near that spike, still up 13% from yesterday. The reason was simple, the world’s richest man, Elon Musk, just reported that Tesla has bought $1.5 billion of Bitcoin with its cash reserves. From the 10K lodged with SEC:
“As part of the policy, which was duly approved by the Audit Committee of our Board of Directors, we may invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds and other assets as specified in the future. Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future,”
In simple terms, Tesla is recognising they can hold cash earning no meaningful interest that is debased every day, or a hard asset that is outperforming every other, whose supply decreases, not increases. So why bitcoin particularly?
Wall Street fund manager legend Bill Miller was one of the first of the big boys to buy Bitcoin some years ago, albeit after initially being sceptical in 2017. In his recent investor letter he lays out the value proposition most eloquently and its worth sharing.
“The short answer is that there is no other asset that combines Bitcoin’s liquidity with its upside potential. Bitcoin is still an emerging and under-owned technology in an enormous addressable market, and it has a brilliant, logically consistent protocol with distributed governance. Data from the World Bank, IMF and OECD imply that the total amount of broad money in the world at the end of 2020 was north of $130 trillion.
At a market capitalization of $700 billion, Bitcoin represents approximately half of one percent of all the accounting systems in the world, despite some clear advantages over them. Between the end of 2019 and October of 2020, the globe’s stock of broad money grew at a 20% annualized rate. In comparison, the supply of Bitcoin grew by 2.5% in 2020. In other words, Bitcoin’s total market capitalization today equates to just half of the global money printed during an average two-week period in 2020. Its supply is known and will not change due to new constituencies, policy-making errors or unanticipated consequences. No one will threaten to temporarily shut down owners’ access to Bitcoin because of a pandemic. It is harder to steal than other stores of value, and it changes hands much more easily.
There is more information and transparency around Bitcoin than there has been around any currency in the history of the world, and buyers know what they are getting.
Perhaps most importantly, Bitcoin has been the best performing asset over eight of the past ten calendar years, and its annualized performance has blown away the next-best performer, the Nasdaq, by a factor of ten over the past decade. Not owning any Bitcoin has been a massive mistake, and we expect that will continue to be true. A long-term candlestick chart shows progressively higher lows despite significant volatility, clearly representing growing demand from long-term holders willing to tolerate the swings.
There is a twelve-year track record of demand growing consistently faster than supply, and failing to own any Bitcoin at this point implies a belief that there will be a reversal in a long-prevailing and increasingly powerful trend. Almost every long-term holder of Bitcoin has earned a higher rate of return in Bitcoin than in anything else, and those who understand it see little reason to put their excess marginal liquidity into other assets at this point. The world is ruled by fattail events, or seemingly improbable occurrences that have an outsized impact, and all indicators so far point to Bitcoin being one. Preferred mediums of exchange tend to move in long cycles, and we may be in the midst of a major global transition that continues to go largely unnoticed.
Bitcoin is not without its doubters, and any serious investor must consider the opposite perspective and weigh its merits. We have thought through some of the common objections, which follow:
- “It’s a Ponzi Scheme.” This is easiest to address, because it demonstrates a lack of understanding of both Bitcoin and Ponzi schemes. Bitcoin is quite the opposite of a Ponzi scheme, which involves a central criminal extracting value from current investors using new investors’ money to fund redemptions while falsifying stated returns. There is no middleman in Bitcoin – only a network of users governed by an established protocol. Indeed, the value of the network grows with its aggregate usage, but users share in the value growth as new users adopt the technology. The market’s deep liquidity and supporting infrastructure leave no doubt that the price and stated returns of Bitcoin are as real as it gets.
- “It Produces Nothing and Therefore Has No Intrinsic Value.” What it “produces” is the ability to store and transmit value according to a logical, predetermined algorithm and decentralized governance. The value of any asset that pays no dividends, like Berkshire Hathaway stock or the US dollar, is what buyers and sellers collectively believe it is worth. At Bitcoin’s current market capitalization of $700 billion, buyers and owners believe it is more valuable than all but six companies in the S&P 500 (all of which are tech companies).
- “Some Other Coin or Technology Will Replace It.” Unlikely at this point. A look at the history of new technological standards would show many instances in which the winner is not always the most robust technology but the one that is early and robust enough. Bitcoin’s market cap is over 5x Ethereum’s, and while Ethereum may be a survivor, there are ways to mimic its functional benets with Bitcoin.
- “It’s Too Volatile to Be a Store of Value or Medium of Exchange.” Indeed, as we agged earlier, it has done much better than simply “store” value. When Bitcoin’s volatility approaches that of Treasuries, its market cap and price per bitcoin will be immensely higher and leave little room for excess return. At that point, one could imagine Bitcoin transitioning to become a more commonly used medium of exchange.
- “If It Actually Works, Regulators Will Ban It.” It has worked for twelve years with little regulatory interference under multiple administrations. In fact, the regulatory outlook for Bitcoin in the US has never been brighter, which may explain why so many institutions are now getting involved. In 2014, a senior member of the Federal Reserve Bank of Saint Louis studied Bitcoin and concluded that, “enforcing an outright ban is close to impossible…well-run central banks should welcome the emerging competition.” The Office of the Comptroller of the Currency, which is a branch of the United States Treasury Department, has said that chartered banks can now custody cryptocurrency and use blockchain technology to settle transactions. The US government collects capital gains taxes on Bitcoin and has auctioned over $6.5 billion dollars at current market value to the public. It would be an abuse of power to sell property of that much value to a government’s constituents, collect taxes on it and then ban it. The new head of the SEC, Gary Gensler, is a Bitcoin fan
While we believe the next decade will see adoption grow at a much faster rate than it did during Bitcoin’s first decade, it is unlikely that Bitcoin will work so quickly that it becomes disruptive to long-standing reserve currencies, and to the extent it does, it will be worth a lot more.”