Feb 9, 2021 - Economy

What Tesla's bitcoin purchase means for the future of the dollar

Illustration of the Tesla logo about to pop a balloon with a picture of Benjamin Frankin

Illustration: Sarah Grillo/Axios

Large and respected institutions, including a $1 trillion company run by the richest person on earth are starting to worry about the world's institutions, most notably the stock market and fiat currencies, and they are taking steps to hedge the risks.

Why it matters: Tesla's announcement that it will invest its reserves in bitcoin and gold as well as dollars makes the company part of a growing movement away from the greenback — which has long been the world's primary and most trusted store of value — and the largest and most high-profile company to do so.

  • The $1.5 billion bitcoin investment accounts for nearly 8% of Tesla's cash assets.

What we're hearing: As central banks continue to push trillions of dollars a month into markets more firms are starting to see holding dollars as a risk, Axel Merk, president and portfolio manager at Merk Hard Currency Fund, tells Axios.

  • "The world doesn’t move on facts, it moves on perception," Merk says.
  • "Do you think there’s a risk that the dollar is going to decline, going to debase? If you think it’s a risk that’s noteworthy, what are you going to do about it? These things become more of a self-fulfilling prophecy if more and more people endorse their view."

The big picture: Tesla is the latest and largest to announce an investment in bitcoin, but not the first.

  • Insurance giant MassMutual, in business since 1851, purchased $100 million of bitcoin for its general investment fund and acquired a $5 million minority equity stake in institutional crypto manager NYDIG.
  • Square, PayPal and Visa all announced investments and ventures allowing bitcoin payments on their platforms.
  • Business intelligence firm MicroStrategy said in December it had purchased a sum total of 40,824 bitcoins, current value $1.7 billion, and had sold bonds to raise the capital to do so.

Between the lines: While developed market central banks have been printing money, central banks in emerging markets have been gradually adding to their holdings of gold rather than dollars, especially countries like China, Turkey and India.

  • Russia has increased its gold holdings so much that its central bank now holds more gold than dollars.

Yes, but: The overwhelming majority of companies' and countries' reserves remain in dollars.

Be smart: It's not just the dollar companies and individuals are losing faith in, Douglas Borthwick, chief marketing officer and head of business development at crypto trading platform INX, tells Axios. It's fiat currencies overall.

  • "Why save your wealth in a currency at a bank with a negative interest rate when your government is printing and distributing even more of that same currency out of thin air?" says Borthwick, who was previously managing director at Chapdelaine FX Trading.
  • "Your own wealth and currency becomes worth less. Fiat currencies are not going away. Neither is money printing."

Charted: Gold underperforms

Data: FactSet; Chart: Axios Visuals

By engaging in quantitative easing and convincing market participants that they stand ready to print a literally endless amount of money in an effort to buoy their respective economies, the world's central banks have eroded the perceived value of their currencies, experts say.

  • Using that money to buy bonds drove down the value of fixed-income instruments and made their interest payments negligible and often negative ($18 trillion of the world's bonds currently hold negative yields).
  • Central banks' implicit promise to step in if asset prices fell significantly has pumped stock indexes to extreme valuations and eroded trust in the equity market.
  • The expected increase of trillions of dollars of government spending is further fueling fears of assets losing their value.

What's happening: As bitcoin's price has driven higher, more firms and individuals are embracing it over traditional inflation and currency debasement plays like gold.

  • Its status as an asset outside the control of typical "elites" or institutions is adding to its popularity, but its primary draw is likely the mesmerizing price appreciation.
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