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What we have learn from Tesla's Bitcoin Bet?

They're arguably the two biggest business names on the planet: Bitcoin and Elon Musk. So when the [hotlink]Tesla[/hotlink] CEO disclosed in the Q1 earnings release on April 26 that the EV-maker had booked a fat gain by selling part of the Bitcoin horde it famously amassed early this year, the Twitter-sphere erupted. Bitcoin skeptic Dave Portnoy, the celebrity blogger, ripped Musk for perpetrating a con. "So am I understanding this correctly? He pumps it. It goes up. Then he dumps it and makes a fortune," tweeted the founder of Barstool Sports. Bitcoin fans fretted that Musk was souring on the signature token he'd done so much to promote.

Sword drawn, Musk riposted to foil Portnoy and reassure the loyalists. "No, you do not," he responded to Portnoy's tweet. "I have not sold any of my Bitcoin. Tesla sold 10% of its holdings essentially to prove liquidity of Bitcoin as an alternative to holding cash on the balance sheet." This was apparently the first time Musk disclosed that he himself owns Bitcoin. That news, and assurances that he's keeping all his coins, backed by the CFO's pledge that Tesla's a long-term holder, cheered enthusiasts and recharged the bull run that started the previous day. Following the release, Bitcoin rose 2% by early afternoon on April 27 to $54,092.

How much has Tesla made on Bitcoin? Ever since Tesla announced its $1.5 billion Bitcoin purchase in the 10K, issued on February 8, it's been clear that the EV-maker's been harboring big gains. Still, the Q1 report provides new detail on the approximate price Tesla paid, how many coins remain on its balance sheet, and how much it's made on its big wager. The numbers also reveal a troubling truth: In the first quarter, the digital currency's appreciation dwarfs what Tesla earned in its bedrock business of selling cars and batteries, and providing software updates and other services.

Accounting rules classify digital currencies as "indefinite-lived intangible assets." If at the end of a quarter, the price of Bitcoin falls below what the company paid, it's required to take an "impairment" charge reflecting the size of the hit. But if the price rises, the owner doesn't show that appreciation on the balance sheet. The holdings are still shown at the amount or "book value" the company originally paid.

The big profit recorded in Q1 reveals the approximate size of the overall windfall. A note on page 5 discloses that Tesla booked a $101 million "positive impact" from the sale of Bitcoin, recorded in the 'Restructuring & Other' line on the income statement. The cash flow statement shows that the sale garnered proceeds of $272 million. Hence, we know that Tesla paid $171 million for Bitcoin it sold for $101 million more, clinching a 59% profit. On the conference call, CFO Zach Kirkhorn stated that the transaction happened "later in March."

Bitcoin's price was uncharacteristically steady in the last three weeks of March, averaging $55,100. So the math suggests that Tesla sold around 4,800 Bitcoins at that price to raise the $272 million. We also can reckon what Tesla originally paid for its stake. Since it pocketed a 59% gain on every Bitcoin sold, its original cost must have been about $34,700. Makes sense. That's close to the average quote in the January to early February period that bookends Tesla's purchases. It appears that the $1.5 billion investment bought roughly 43,000 Bitcoin.

Once again, the book value––or what it paid––for the tokens sold is $171 million. So we know the approximate balance-sheet number for what remains is the original investment of $1.5 billion, less the $171 million, or about $1.329 billion. We also know the approximate purchase price per coin of $34,700.

Result: Tesla still holds around 38,300 Bitcoin that cost $1.329 billion. At Bitcoin's price of $54,100 on April 26, Tesla's trove is worth $2.07 billion. Tesla's gain on what it still owns is $741 million. Add the $101 million from the Q1 sale, and its total take is $842 million.

These numbers are approximate, but present what should be close to the full picture. On its balance sheet, Tesla displays its "digital currency" holdings at $1.331 billion. That's $2 million more than the number I get from deducting the sale from its original purchases. But on the earnings call, Kirkhorn said that Tesla "continues to accumulate Bitcoin from transactions from our customers as they purchase vehicles." Musk's famous declaration in February that Tesla would accept the coins in lieu of dollars or yuan may well explain the $2 million discrepancy. If forty customers opened their Bitcoin wallets to buy or make deposits on $51,000 Model 3s, those sales would account for the extra $2 million-worth in Tesla's coffers.

My main misgiving: Both Musk and Kirkhorn refer to selling 10% of Tesla's stake. My math shows it parted with just over 11% of the number of coins purchased in Q1. So it's possible I'm missing something, or that Musk and Kirkhorn were giving a ballpark figure.

Musk wants to keep holding Bitcoin, but will Tesla buy more? On the conference call, Kirkhorn spoke extensively about Bitcoin's benefits, and why Tesla sold. "Elon and I were looking for a place to store cash that wasn't being immediately used, trying to get some level of return on this, but also preserve liquidity," he declared. The rationale for trimming its position, he explained, was in part to test the ease of buying and selling. Bitcoin passed in a walk. "We've been quite pleased with the liquidity in the Bitcoin market," said Kirkhorn. It would be interesting to know what commissions Tesla paid in reaping that $272 million. [hotlink]Coinbase[/hotlink], the largest U.S. crypto exchange, recently disclosed average fees of 0.47% on each dollar it handles in transactions. At that rate, Tesla would have paid a jaw-dropping $1 million to make the trade.

Kirkhorn affirmed Tesla's commitment to Bitcoin, as did Musk in his [hotlink]Twitter[/hotlink] jab at Portnoy. "We do believe in the long-term value of Bitcoin," observed the CFO. "So it's our intent to hold what we have long-term and to continue to accumulate Bitcoin from transactions from our customers as they purchase vehicles."

What Kirkhorn didn't say is that Tesla has any intention of making more mega-bets like the $1.5 billion buy that helped propel the Bitcoin to never-before-seen prices.

In Q1, speculating in Bitcoin was far more profitable than selling EVs Tesla's been producing autos since 2008, but it's only been trading Bitcoin for a single quarter. It's worth noting that during its maiden three months doing both, it fared much as a Bitcoin speculator than as a carmaker. In Q1, Tesla posted pre-tax profits of $533 million. But those earnings included $519 million in sales of regulatory credits, a boost that will soon disappear, as well as the $101 Bitcoin bonanza. Subtract those benefits outside selling cars, batteries and services, and it lost $87 million.

Excluding the $101 million profit, its appreciation from the Bitcoin foray amounted to well over $700 million. Despite that bounty, the decision to tie Tesla's fortunes to an ultra-volatile investment was a poor one. Given the crypto's wild fluctuations, the big holding will only make Tesla's already uncertain profitability harder to forecast. What Tesla investors don't need more of is risk. Instead of gorging on Bitcoin, Musk could pay a special dividend with this excess cash, and let shareholders decide whether to buy Bitcoin or do something else with the cash. Musk is a brilliant, charismatic leader who is sidetracked on a Bitcoin misadventure. He should get back on the track, keep his eyes on the road, and stick to making vehicles that change the world.

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