Feb 9, 2021 - Economy

Why Tesla went into bitcoin

Data: YCharts; Chart: Axios Visuals
Data: YCharts; Chart: Axios Visuals

When Elon Musk's Tesla spends $1.5 billion on bitcoin and announces that it will start accepting the cryptocurrency as payment for its cars, it's natural to ask why it would do such a thing.

Why it matters: The simplest explanation — it's just Elon being Elon — is almost certainly the correct explanation. But it also makes sense that the Tesla CEO would do such a thing.

What's happening: Musk's move is a show of strength. It displays his leadership in a new domain — cryptocurrencies — and it also cements Tesla's position as a company that can afford to invest $1.5 billion in a risky non-core venture. The company has come a long way from its near-death experience in 2018.

The big picture: Tesla is closely aligned with bitcoin in terms of market value, which makes it seem that as far as the markets are concerned, what's good for bitcoin is good for Tesla, and vice versa.

  • By making such a large bet on bitcoin, Musk becomes something of a hero to the bitcoin faithful. Those people are often affluent, tech-savvy early adopters — exactly the market that Tesla is targeting with its cars.
  • Thanks to Musk, Tesla can do things no other car company is capable of — like, for instance, becoming instantly and indelibly associated with bitcoin in the public's mind. As a marketing strategy aimed at a specific audience, that can be very effective, whether or not that target market will actually use bitcoin to pay for the cars they purchase.

Our thought bubble, from Coindesk's Zack Seward: The news of the bitcoin buy follows an escalation in crypto memery from the Tesla founder in recent weeks. Crypto was early in seeing “meme strategy” as a legitimate community engagement technique.

Between the lines: With his announcement on Monday, Musk bet on both bitcoin as a store of value and bitcoin as a payments mechanism. He said that the move into bitcoin was designed to "maximize returns on our cash," and also pledged to accept bitcoin as payment for Tesla vehicles in future.

  • Seward notes that the U.S. tax code and tepid consumer interest have stifled bitcoin payments to date, and that interest in bitcoin as an investment is much greater than interest in bitcoin as a form of payment.
  • Hope remains that bitcoin might take off in terms of payments. As a bitcoin evangelist, Musk surely feels that he should do his part to enable and encourage that.

The other side: By investing in a technology with an enormous carbon footprint, Musk risks tarnishing Tesla's environmentally responsible credentials.

  • It will be interesting to see whether and how environmentally conscious investors react to this news in coming days and weeks.
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