Holders of Bitcoin may be able to cash in some of their investment in the digital currency for a brand new electric car.
Electric car maker Tesla said on Monday that it has invested around USD 1.5 billion in Bitcoin and plans to start accepting the digital currency as payment for its high-end vehicles soon.
The price of Bitcoin soared 15.4 percent to around USD 44,500 Monday in reaction to Tesla's announcement, according to CoinBase.
California-based electric car maker Elon Musk revealed the new strategy in a filing with the U.S. Securities and Exchange Commission, saying its investment in digital currency and other alternative reserve assets may grow.
Bitcoin has attracted enthusiasts for its scarcity and security, but the volatile digital currency is not yet widely used to pay for goods and services.
It was primarily a store of value, like gold, with some limited traders like Overstock accepting Bitcoin as payment.
It is also used by those who do not trust the banking system or by criminals seeking money laundering.
It is unclear whether the other major companies will follow in Tesla's footsteps to invest in Bitcoin or accept transactions.
A vehicle is a large purchase, which could make Bitcoin a better fit to pay for it, but large fluctuations in the price of Bitcoin could be a big risk for any trader who decides to accept it.
It was wise of Tesla to announce that it will deem its investment in Bitcoin as an alternative asset. That is certainly appropriate because Bitcoin might be coming into greater acceptance as a currency, but it is not cash, said Anthony Michael Sabino, a professor of law, at St. John's University.
Tesla said last month it had cash and cash equivalents of USD 19.4 billion after selling new shares to take advantage of a rising stock price. Dan Ives of Wedbush Securities said the move gives Tesla more flexibility to further diversify and increase its cash returns.
Tesla is in a unique position to accept cryptocurrency for payment, because the automaker does not rely on a network of independently owned dealerships to sell its cars, unlike traditional auto companies like General Motors and Ford.
Amplify Transformational co-portfolio manager Michael Venuto said that it certainly appears that in addition to being adopted as a store of value for its own trust or private assets, it appears that MASIC is embracing it as a transactional tool as well as a data tool, fund sharing, an exchange-traded fund that attempts to invest in cryptocurrency technologies.
Venuto’s fund owns a small amount of Bitcoin but is investing primarily in companies that are based on these technologies.
Even with Tesla's support, it could be some time before those who have made money investing in Bitcoin use it to buy a car.
Jessica Caldwell, executive director of Insights at Edmunds.com, doesn't expect it to become popular because most people take out loans to buy or rent their cars and they don't pay cash, as Plus said, at this point, most people will not be comfortable risking cryptocurrencies like these purchases are very expensive.
Other experts say that it is only a matter of time before Bitcoin finds widespread use in transactions.
I think the trend is ruthless, said Richard Lyons, a finance professor at the University of California, Berkeley, and predicted that Bitcoin and other digital currencies "will increasingly become transactional currencies over the next five years."
It's not going to happen overnight.
It remains to be seen whether Tesla will gain a final competitive advantage by accepting Bitcoin.
The automaker could simply invest in Bitcoin because Musk is known to have selective tastes. Musk launched a Tesla into space to demonstrate the payload capabilities of his SpaceX rockets.
Like Tesla, Virginia-based MicroStrategy announced in August that it would use some of the surplus cash on its balance sheet to invest in alternative assets like Bitcoin. The move has paid off so far.
As of February 2, the business analysis firm said it had acquired 71,079 Bitcoins that it had purchased for a total price of USD 1.15 billion since last summer. With a value of USD 44,500, these Bitcoins are valued at USD 3.16 billion.
MicroStrategy shares are up 660 percent since the August announcement, but the shares are subject to a change in the price of bitcoin. They closed up 29 percent Monday at USD 1,041.
Palo Alto-based Tesla announced its first annual net profit in 2020, and its share increased to make it the most valuable automaker in the world. Tesla joined the S&P 500 late last year and is valued at USD 824 billion, which is about 2 percent of the benchmark index.
So the funds that track the S&P 500 now have some exposure to Bitcoin, no matter how small that may be.
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