There has been a truly colossal increase in the price of bitcoin. Something on the order of fourteen percent in less than one hour! We are writing this article three hours after the massive spike up to 44,000 dollars USD occurred. It looks like the spike began at 12:35 PM UTC (7:35 ET). And the price is still holding that level, $44,200 at press time.
So why did the price rocket so much? Well it began with an SEC (U.S. Securities and Exchange Commission) filing. Tesla Motors Inc. [stock_quote symbol=”TSLA” template=”%symbol% %price%” ] filed a form 10-K with the SEC, and since Tesla has a lot more than 10 million dollars in assets, this form had to be made available to the public. The form was released on the SEC website and Tesla’s investor relations page this morning, Monday February 8.
You may be wondering what a form 10-K is. Well, according to Tesla Investor Relations, it is an ‘Annual report which provides a comprehensive overview of the company for the past year’ So, the form 10-K basically tells people what investments the company has made, information about the company’s assets, its stock, operational costs, liabilities, income, products (self-driving cars for example) and other information related to the companies finances and operations.
So how did this report affect the price of bitcoin? Well, all of this excitement stems from one small paragraph in the middle of Tesla’s 10-K. Here is that paragraph. You can read the whole report HERE.
In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity… 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, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.Tesla Motors Inc. SEC form 10-K
Tesla bought 1.5 billion dollars worth of bitcoin. Assuming that they bought at $35,000 (the price was around there for much of January) that would equate to 42,000 BTC. That is a large amount. It took some of the fiat on its balance sheet and converted into bitcoin, a new type of cash. This is very big news because it means that giant companies like Tesla are starting to use bitcoin instead of cash. Companies all need some sort of liquid assets. They need to be able to buy expensive things and pay off debts. Liquidity equals smooth operation. They cannot buy factories with stock, at least not directly. Elon Musk was considering using bitcoin for large transactions back in December 2020. This is most likely due to the fact that it is really hard to move giant sums of normal cash (like a billion dollars). Big fees have to be paid and it is a big hassle. In this Twitter conversation with Micheal Saylor, the CEO of Microstrategy, Musk asked about the feasibility of using bitcoin for enormous transactions.
With bitcoin, one billion dollars can be sent for the same fee as one dollar. Right now, fees are little high. If you want a reasonably fast transaction, you have to pay $11.45 according to bitinfocharts.com. But that is a different story, and there are many solutions in the works.
Credit cards and banks tend to charge a fee based on percentages. 3% for some credit cards according to the documentary The Rise and Rise of Bitcoin. And big wire transfers require tons of paperwork and time. So it is difficult and expensive to move lots of regular money around. With bitcoin, since sending one dollar or a million is done through the same process, there is lots of potential for big companies. All that a company like Tesla would have to do to send all of its bitcoin would be to create a transaction with a ten dollar fee, sign it, broadcast it, and wait an hour for the transfer of bitcoin to be complete (transactions need to get confirmations which takes a few minutes). It is that simple. That is one of the reasons why Tesla Inc. bought all that bitcoin.
Another reason that they cited was that they want to ‘further diversify and maximize returns on our cash.’ According to federalreserve.gov, the supply of US dollars increased 27 percent in 2020 (from 15 trillion to 19 trillion). When supply increases, value goes down, because the dollar becomes less rare. This large increase in the supply of money points towards inflation. Companies do not want their assets to devalue. They want to earn money from their cash, as Tesla said, not let it depreciate. So, they are buying bitcoin, a type of money that has a fixed supply of twenty-one million.
So, what are the repercussions? Tesla and Microstrategy’s buying of bitcoin sets a precedent. Other corporations (especially tech ones like Google and Apple) might follow suit and buy billions of dollars worth of bitcoin. Tesla is showing that bitcoin can replace cash as an asset that companies use to preserve their wealth. Elon Musk might be a little strange, but he is not wrong about bitcoin’s potential.
The most exciting part of this entire thing is that Tesla Motors stated that it will begin allowing people to buy Tesla Electric Vehicles with bitcoin. This makes a lot of sense. Bitcoin fees might be a couple of dollars but that means nothing in the context of a thirty-five thousand dollar (or more) car. Imagine being able to buy a car over the internet (like Tesla is already doing) and pay for it using internet money, bitcoin. No more complex financing. If you have enough bitcoin you could simply send the right amount to Tesla’s bitcoin address, and your car would be shipped. If you are like most people, and need a loan, bitcoin smart contracts and lending protocols can help you out.
When Tesla Motors begins to allow people to pay in bitcoin it will be a game changer. Tesla might be able to establish bitcoin’s legitimacy as both a reserve asset and a functional currency for big purchases in particular. This might be what is needed to set bitcoin on the road to one hundred thousand dollars!
None of this is financial advice, and nothing in this article should be construed as such. The cryptocurrency market is still volatile, so never invest more than you can lose. And do your own research.
Image from pixabay.com