Elon Musk's $1.5 billion bet on bitcoin has exposed Tesla to 'immense' risk that could wipe out its profits, analysts say

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Elon Musk's $1.5 billion bet on bitcoin has exposed Tesla to 'immense' risk that could wipe out its profits, analysts say
Elon Musk's Tesla snapped up $1.5 billion of bitcoin in January, but analysts said it was a risky moveFrederic J. Brown/Getty Images
  • Elon Musk's foray into bitcoin is a big risk to Tesla's balance sheet, analysts said.
  • Tesla will have to factor any fall in value of the $1.5 billion holding into its earnings.
  • Yet the car company cannot recognize any gains as profit until it sells the bitcoin.
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Tesla's decision to buy up $1.5 billion of bitcoin exposes Elon Musk's electric car company to "immense" risks that could wipe out its annual profit if the cryptocurrency's price plunges, a Saxo Bank strategist warned on Tuesday.

Musk's company revealed in a regulatory filing on Monday that it had invested around $1.5 billion in bitcoin and intended to start accepting the currency as payment.

Cryptocurrency investors cheered the announcement and sent the bitcoin price soaring to a record high above $48,000 early on Tuesday. It was last up 6.26% at $46,170.

Yet many analysts were skeptical about the purchase and highlighted the extreme volatility of bitcoin.

Read More: UBS says bitcoin is a bubble and too volatile to diversify a portfolio, unlike gold - here's why the bank says it could end up 'worthless'

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"CEO Elon Musk has dramatically increased the risk of Tesla," Peter Garnry, head of equity strategy at Saxo Bank, said in a note on Tuesday.

"In our view, the move by Tesla is both risky and obfuscating the valuation of the company. With the volatility in bitcoin, Tesla could easily experience a 50% loss on their $1.5 billion investment."

Garnry said such a sharp plunge would add a $750 million paper loss to Tesla's accounts, which would be "almost the entire [2020] adjusted net income of $812 million."

"In other words, Elon Musk has exposed Tesla to immense mark-to-market risk," Garnry said.

Tesla said in its regulatory filing it would treat its bitcoin holdings as long-term intangible assets. This means the firm would have to recognize a drop in the holding's value against its profits.

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Yet US accounting rules mean Tesla can only recognize any gains if it sells the bitcoin.

Jerry Klein, managing director at Treasury Partners, said: "It remains to be seen how shareholders would react if a decline in bitcoin's price negatively affects Tesla's future earnings."

"Most shareholders own Tesla because they expect them to make money selling cars, not by trading cryptocurrencies with shareholder capital."

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However, backers of bitcoin argue that institutional investment - and now support from companies such as Tesla - mean the cryptocurrency is set to keep rising. They predict bitcoin will avoid plunging as it did three years ago, when it dropped from more than $19,000 at the end of 2017 to to below $3,500 in early 2019.

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Michael Wu, chief executive of crypto firm Amber Group, said: "I don't think you can call bitcoin a bubble any more. We have rising demand and a fixed supply."

Dermot O'Riordan, partner at private equity firm Eden Block, said: "This moment will likely be looked upon in years to come as a genuine tipping point. Elon and Tesla's support legitimizes crypto and opens up bitcoin to a whole new class of retail and institutional investors."

Tesla stock rose on Monday but slipped around 1.66% on Tuesday to $894.34. Tesla has been contacted by Insider for comment.

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