Few observers are better qualified than Alex Pickard to assess Elon Musk’s astounding decision to channel $1.5 billion of Tesla’s corporate cash into a bet on Bitcoin. Pickard is a former big-time Bitcoin miner who abandoned the cryptocurrency when, in his view, it strayed from the original mission of becoming a consumer currency and gold-like store of value to degenerate into a casino chip for digital gamblers. It so happens that Pickard is also a student of sound corporate practices as a vice president at Research Affiliates, a firm that oversees $145 billion in investment strategies for mutual funds and ETFs.
This writer recently wrote a piece chronicling Pickard’s Bitcoin adventures, which encompassed buying $300,000 worth of ASIC-driven mining equipment and moving from sunny California to rustic Wenatchee, Wash., home to the lowest electricity prices in America. There, his machines whirred away in multiple garages. His dream came to grief when the local utility shut down his operation for overloading the grid and Bitcoin’s price tumbled over 80% in 2018. Given his vantage point, it was only natural that I query Pickard on Musk’s unorthodox gambit.
In my own story following the 10-K release that disclosed the purchase––and sent Bitcoin soaring over 20%, to around $48,000––I detailed how a drop in the hyper-volatile token’s value could easily erase a couple of quarters’ earnings, adding just what Tesla doesn’t need—a denser fog obscuring where its profits are headed. But Pickard has a different objection: He says Musk is mistreating his shareholders by embracing Bitcoin. “Companies should return excess cash to shareholders and let investors decide how to use that cash, including the possibility of buying Bitcoin,” he tells me. He says that if Musk paid a special dividend using cash from that overflowing war chest, “he can take his dividend and do so [buy Bitcoin]” for his own portfolio.
Pickard adds that if a company decided to accept Bitcoin for purchases, it would make sense to hold tokens on its balance sheet (the logic being that Bitcoin would be intrinsic to its business since customers are using it to pay). But consumers buy almost nothing with Bitcoin. Indeed, Pickard points out that although Tesla unveiled plans to accept the tokens for payment at a later date, it views the $1.5 billion buy as a way to, as the 10-K states, “maximize returns on our cash.” In other words, as an investment that shifts 3% of the EV-maker’s assets from the safety of money-market funds and Treasuries into a wildly gyrating vehicle with no practical use. “Unless a company’s business model is a cryptocurrency hedge fund,” says Pickard, “it shouldn’t be making speculative bets on Bitcoin.”
Musk also notes that a lot of Tesla’s cash flows from U.S. taxpayers. It receives zero emission vehicle (ZEV) credits from 11 states, most notably California, and federal carbon credits, both of which it trades for cash to rivals whose cars exceed the mandates for emissions. Ten states offer rebates or tax credits for buying Teslas (as well other EVs). In California, the total benefit can reach $9,500 on a Model 3, whose Long Range version starts at $46,990. Tesla has also received $1.3 billion in incentives from Nevada for construction of its battery Gigafactory in Sparks. “In a way, taxpayers bought Bitcoin for Tesla,” says Pickard.
I asked Pickard if Tesla’s pledge to take payments in Bitcoin for its high-end vehicles is a sign that the quicksilver coin may finally fulfill its founding mission as a widely accepted currency. His view is that Bitcoin transactions are so expensive that the token is only good for buying extremely expensive items. “Bitcoin costs $10 to $20 per transaction, and 350,000 transactions is the maximum daily volume,” says Pickard. In its present form, Bitcoin could never be used for everyday purchases.
But if any product might be right for Bitcoin, it’s those $40,000 to $200,000 Teslas. Big transaction fees prevent supermarkets and drugstores from taking Bitcoin, but the $10 or $20 extra that it would cost Tesla is tiny compared to the big-ticket sale. Musk could captivate millennials who think it’s cool to buy a Model Y from their Bitcoin wallet. That’s if Tesla’s treasury can handle getting paid in tokens that lurch crazily to double-digit gains or losses in a single day. It might even bank the Bitcoin reaped from those sales to swell its already big bet on the cryptocurrency. For shareholders, that kind of craziness is uncool.
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