Tesla Inc. has become the latest major corporation to make an investment in bitcoin, underscoring the increasing acceptability of the digital asset.

 

The big question observers are asking is, why is the Elon Musk-run company doing this?

 

Monday, electric-car maker Tesla (TSLA) said in a public filing (https://www.sec.gov/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm) that it purchased $1.5 billion of bitcoin and that it expects to begin accepting payment in the cryptocurrency for its products in the future.

 

The move by Tesla to invest in bitcoins was seen as further confirmation of the legitimacy of the nascent asset that didn't exist until about 12 years ago.

 

However, bitcoin is seen as a volatile asset that is prone to sharp price volatility and Monday's announcement by Tesla was described by some corporate finance professionals (https://www.marketwatch.com/story/is-teslas-1-5-billion-bitcoin-buy-smart-corporate-finance-experts-weigh-in-11612817269) as an unnecessary addition of risk to the vehicle maker's balance sheet in the form of currency or a commodity, depending on how you classify bitcoin.

 

While it's not clear, at this point, why Musk & Co. have opted to expose the company to the possible risk of owning bitcoin, here are a few reasons why the revolutionary company may have aligned itself with the crypto crowd.

 

Tesla made it clear in its statement filed with its regulator the Securities and Exchange Commission that it sees bitcoin as a chance to diversify its cash and cash-equivalent holdings.

 

Corporations usually hold excess cash and/or cash-equivalents, like Treasury bills or commercial paper on their books to provide operational liquidity and generate returns while limiting risks.

 

Tesla wrote, "we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity."

 

The move isn't without risk, Tesla acknowledges as the price of bitcoin could slump.

 

"If we hold digital assets and their values decrease relative to our purchase prices, our financial condition may be harmed," the company acknowledges.

 

But a single bitcoin, which has soared 62% so far this year, could easily be headed for a six-digit value if bullish momentum continues to build, which would make Musk look smart.

 

"Thankfully, Elon Musk on Monday once again ensured no one would be bored, with the unexpected announcement that Tesla will buy bitcoin and accept them as payment for vehicles," writes Craig Erlam, senior market analyst at Oanda, in a Tuesday research note.

 

The analyst referred to the move as a "publicity stunt," a move that everbody is talking about, but there are a number of ways to think about it.

 

Bitcoin is associated with a group of iconoclastic founders who were attempting to break the mold on payments and fiat money. That was the idea behind cryptos being written into code back in 2009 by a person or persons known as Satoshi Nakamoto.

 

Those rebellious notions align somewhat with Musk's own agenda of disruption. Tesla is making electric-powered vehicles in a world that has thus far been dominated by fossil-fuel driven cars.

 

Moreover, Tesla's direct-to-customer sales model also is viewed as trendsetting, since many companies sell their cars through unaffiliated dealerships.

 

Bitcoin's image as a decentralized asset, not controlled by any one body, also fits with Tesla's image and that of its leader Musk.

 

Tesla's $1.5 billion investment in bitcoin could also be a simple hedge against the hegemony of the U.S. dollar as the world's reserve currency since World War Two.

 

Bitcoin, or something like it, represents the future of payment systems to many supporters, even if it isn't currently an effective means of exchange due to its current volatility.

 

"Yesterday's move by Tesla to invest in bitcoin and start accepting it as payment for its own products really moved the needle," wrote Simon Peters, cryptoasset analyst at multiasset investment platform eToro, in emailed comments.

 

Read:Musk's Tesla says it invested $1.5 billion in bitcoin, sending the cryptocurrency to record levels near $44,000 (https://www.marketwatch.com/story/tesla-says-it-has-invested-1-5-billion-in-bitcoin-prices-surge-to-record-above-42-000-11612790314)

 

The eToro analyst said that there are unconfirmed talks about technology behemoths Apple Inc. (AAPL)and Google-parent Alphabet Inc. (GOOGL)(GOOGL), linking it to their own payment systems.

 

Musk is viewed as an innovator tied to electric vehicles, batteries and space exploration via SpaceX, but one of his early ventures was in payments.

 

Read: Is Tesla's $1.5 billion bitcoin buy smart corporate finance? Experts weigh in (https://www.marketwatch.com/story/is-teslas-1-5-billion-bitcoin-buy-smart-corporate-finance-experts-weigh-in-11612817269)

 

The Wall Street Journal notes (https://www.wsj.com/articles/tesla-buys-1-5-billion-in-bitcoin-11612791688?mod=hp_lead_pos1) that, the Tesla CEO invested most of the $22 million he earned from the sale of an internet business into a new startup, X.com, which became PayPal Holdings (PYPL) about 20 years ago.

 

PayPal currently is among the vanguard of bitcoin revolution. PayPal back in November opened up its cryptocurrency platform to all U.S. customers after conducting a more narrow rollout.

 

Moreover, several high-profile Wall Street investors, including Stanley Druckenmiller and Paul Tudor Jones, have embraced bitcoin. Famed investor Bill Miller, founder of Miller Value Partners, in a letter to clients (https://millervalue.com/bill-miller-4q-2020-market-letter/?utm_source=enews&utm_campaign=market) earlier this month published on the firm's website, reaffirmed his bullish outlook on bitcoin.

 

In other words, Tesla and Musk may be among the biggest to wade into the crypto pool, but a growing cadre of investors are starting to view the volatile digital-ledger-backed cryptos as a bona fide asset.

 

"Corporate adoption takes another leap forward with Tesla announcement," writes Devin Ryan, analyst at JMP Securities in a Monday research note.

 

The researcher, along with fellow analyst Brian McKenna, noted they "believe the building 'network effect' around bitcoin is moving the broader crypto asset class into the mainstream, and with many hundreds of billions of dollars of value in infrastructure supporting the asset class, we see the already substantial (and growing) vested interest in its success as bullish for the industry."

 

On Tuesday, bitcoin touched a record high around $48,000 before pulling back, as the Dow Jones Industrial Average , the S&P 500 and the Nasdaq Composite indexes have seen relatively tepid trade on the day.

 

Check out:Bitcoin blows past $45,000 and reaches as high as $48,000, driven by Tesla's investment (https://www.marketwatch.com/story/bitcoin-blows-past-45-000-to-fresh-highs-above-47-000-driven-by-teslas-investment-11612861528)