Is Tesla's Bitcoin Gambit Genius or Madness?
As with everything Elon Musk does, the answer lies somewhere in the murky middle...
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Over a month ago Tesla announced it had purchased $1.5 billion in Bitcoin, representing 10% of the company's cash reserve. In the same breath, the only electric car manufacturer named after a Serbian-American futurist announced it would accept Bitcoin as payment for said autos. The (already) biggest cryptocurrency on the planet immediately jumped from $4,000 to $43,000 and rallied to $50,000 the following week. Now that I have your attention, let's deconstruct...
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The maestro of Twitter hype
When one of the richest men in the world is not busy building the next multi-billion-dollar company, he very much enjoys taking his thoughts, and tongue-in-cheek comments, to Twitter. It is almost frightening to see the impact 140 characters gets as it moves an asset worth nearly $1 trillion.
Elon Musk will eventually have to take a step back from hyping Bitcoin on the social media platform as this could be seen as market manipulation even if legislation in this area remains ambiguous. Legal advisors have already warned against possible SEC actions.
"It would not be surprising—given the focus on the chief executive's Tweets, Bitcoin pricing and recent dramatic market moves—for the SEC to ask questions about the facts and circumstances here," said Doug Davidson, ex-chief of the SEC's division of enforcement, to the Telegraph.
Mainstream media quickly flocked to criticize this buy, arguing that Tesla was putting their shareholders at risk by exposing them, through their equity in the company, to the fluctuations of Bitcoin without actively consulting them on the matter. However if this gambit pays off for Musk, doubters will find it harder for their complaints to be heard. But will it pay?
Related: Elon Musk Responds That 'It Would Be Great' If He Was Investigated For His Dogecoin Memes
Reflexivity is Tesla's secret weapon
When you think about Tesla, do you think about a giant scam or the very future of automobiles?
That is the question author Matti offers in a recent Deribit Insights. Tesla's market capitalization at the moment stands at around $768 billion, ten times that of General Motors. In 2020 Tesla delivered 500,000 cars to customers---an impressive number, to be sure, but nothing compared to the 6,830,000 that General Motors brought to market.
While Musk's market cap dominates General Motors, it does so because Tesla isn't selling you a share in their current company, but rather a share of their tomorrow. They have managed to convince investors that they represent the future of the automobile industry through brilliant marketing, functioning electric vehicles and the little-known investment concept of reflexivity.
Elon Musk's tweets can often look like the ramblings of an intoxicated teenager but despite, or perhaps because of, this his companies thrive in the stock market. He represents a new generation that doesn't wear ties, doesn't want to play by the rules and is only there to disrupt. Investors continue to reward him for it.
The market is becoming increasingly liquid, as retail investors have finally arrived to claim their seat at the table and are becoming a force to be reckoned with, as was shown during the GameStop short squeeze. As Matti wrote in that Deribit Insights piece: "In terms of the markets, soft money seems to exacerbate the effects of reflexivity. In a highly reflexive environment things become valued not at what they are, but how good their memes are."
Reflexivity is the effect of one investor seeing a fellow investor desire something, be it Tesla stock, Bitcoin or a Rolex. This signals him or her that the object or stock is worth desiring which exacerbates the first investor's desire for that same thing.
Related: 'Big Short' Investor Michael Burry Predicts Tesla Stock Will Collapse Like the Housing Bubble: 'Enjoy It While It Lasts'
Bitcoin is the ultimate reflexivity object
Tesla's investment in Bitcoin makes for the ultimate power couple. It is the most well-suited asset to a reflexive circle. Its value as a payment network has not been the driving narrative in its development for the last few years but the exponential reflexivity relation between investors susceptible to buy Bitcoin has only increased, bringing the price to levels previously only dreamed of.
For the specialists in harvesting reflexivity, a Bitcoin investment is a match made in heaven. As Tesla signals every other company in America that Bitcoin is a desirable asset for their balance sheets, they can rest assured the cryptocurrency will remain a desirable asset.
This gambit ain't a gambit. It would be with pretty much any other company, but for Elon Musk? Buying Bitcoin all but guarantees that its price will rise in the coming months.
Related: Bitcoin Spikes 16% To Record High After Tesla Says It Invested $1.5 Billion in the Cryptocurrency and Will Begin Accepting It as Payment