The Tesla founder thrives on disruption but most retail investors will miss the sophisticated nuances that attract celebrities and billionaires to crypto assets.
Cars are depreciating assets. Crypto is more controversial. If you think bitcoin only goes up from here, Tesla is doing a very smart thing by letting people trade their crypto coins for cars.
CEO Elon Musk has already converted $1.5 billion of the company’s cash reserves to bitcoin as a show of good faith. From the timing, it looks like Tesla paid about $34,000 per coin so he’s already deep in the money.
But a year ago, he was bemoaning the “crypto scam level” as “not cool” and said he owned only 0.25 BTC in his personal accounts. Unless he’s spent the last year making up for lost time, it’s hard to see his money backing up his mouth.
After all, keeping even 2% of your fortune in what amounts to cash just doesn’t make sense when you’re occasionally the richest person on the planet. The only real motives here are more about strategy than portfolio design.
From “Enhanced Cash” To Bubble
Officially, Tesla converted 7% of its cash out of dollar assets in order to squeeze a better return out of what would otherwise be dead money.
That makes sense. USD remains vulnerable to the Fed’s fiat printing and money markets are a joke in the face of even mild inflation.
Another corporate giant in another era might have stockpiled gold or foreign currency hedges instead. Since Musk loves novelty, the corporate BTC wallet is his bullion hoard.
But even so, he isn’t going all in on crypto. Tony Scaramucci claims he’s seen enough BTC on the SpaceX balance sheet to estimate that Musk and his companies now own about $5 billion in digital currency.
If so, it means Musk and Space X jointly hold around 43,000 BTC over and above what Tesla bought back in January. That’s another $1.5 billion investment that’s worth more like $2.5 billion today.
And no matter how the accounts slice, that’s a huge short-term return on what amounts to a new form of cash. Speculators have a right to feel pleased with the speed at which their money is moving in the right direction.
Musk can gamble his own wallet and feel that rush, but when you’re dealing with a corporate treasury, volatile assets can be more of a headache.
There’s a reason every company on the planet hasn’t made room on its balance sheet for crypto assets. Tesla maintains the dollar reserves to weather a rollercoaster ride. Whether BTC drops to zero or jumps to $200,000, the company will be able to pay its bills.
Space X is more nebulous. Diverting a hypothetical $1.5 billion to BTC reflects about a year’s revenue, which is a lot to risk on any volatile asset when what you really need is dry powder to reach sustainable scale.
If Space X needs to accelerate what it earns on its cash, the business model isn’t as strong as it needs to be. Cash should never be the money maker in any portfolio. It’s ballast.
And that’s especially true when the line between personal and corporate assets blurs. Musk famously lives by borrowing on the value of his Tesla stock. He never needs to sell a share or earn a salary as long as the company itself remains solvent.
BTC is what amounts to “mad money” for him, a stimulant. Look at any list of crypto-loving celebrities and you’ll see a similar pattern: they like the thrill and don’t need the efficient frontier to get them through bad times.
More “Hedge Fund” Than Hedge
Bill Gates is fine with a slice of crypto in his portfolio. He appreciates the technology and his accountants are probably happy to add another currency hedge to their tool kit.
Hollywood stars like the novelty and the upside profile. That’s their world. They aren’t about risk management or wealth preservation. And tellingly, this isn’t an inflation shield as far as they’re concerned.
Inflation is a theoretical concept for people like Ashton Kutcher and Gwyneth Paltrow. They’re simply too young to know on any gut level how awful a depreciating currency feels over extended periods of time.
They respond to the sizzle. And that, in turn, contradicts the nominal value proposition of crypto in a fiat world. If you’re hoping a hedge will earn you a Vegas-style return, you’re doing it wrong.
I think back to the moment when hedge funds pivoted from relatively boring and arcane absolute-return vehicles into something a lot sexier. It was when conventional long-only markets were faltering and those “routine” return profiles suddenly looked extremely attractive by comparison.
Suddenly hedge funds were where people looked for extreme upside. And the industry did its best to oblige.
BTC is sold as a hedge by people like Jamie Dimon, who know the institutional value of diversifying around the dollar without having to lean too hard on the dead weight of bullion. It’s bought for different reasons.
I can’t help but notice that Musk left most of Tesla’s cash in USD. Even in Tony Scaramucci’s accounts, at most 2% of his wealth has moved into the crypto universe one way or another.
He isn’t all in on the dollar collapse scenario at all. And if he isn’t, I doubt your clients should be either.
I like hedges as the cushion around a robust portfolio. If I were Musk and his accountants, I’d be desperate for any way to stabilize his otherwise extremely volatile net worth against market storms.
After all, this is a guy who is almost entirely invested in Tesla stock and private equity. Adding a few billion dollars in BTC doesn’t exactly smooth that efficient frontier at all.
When liquid BTC funds emerge, it’s going to be interesting to see how they’re deployed. For now, the conversation around USD is probably the most important one for most retail investors.
Musk will do what he wants either way. Right now, he can borrow on BTC at roughly 6% and earn as much as 8% on whatever coins he's bought so far. That's a crazy spread, but these are crazy times.