Tesla’s bitcoin investment, scrutinized by CFOs: we asked CFOs and experts if it’s (or isn’t) a good idea
Zach Kirkhorn is a much lesser known name than Elon Musk, but he bears much of the responsibility for the recent 1.5 billion investment in Bitcoin. The young Tesla’s chief financial officer (CFO) stands in sharp contrast to the media figure of the CEO. While Musk is an almost sickly tweeter, Kirkhorn keeps your account closed. But Musk’s latest move has put Tesla’s finance department in the eye of the hurricane.
Due to his reserved profile, it is difficult to know from his point of view what financial criteria have been followed to make this decision. To know what motivations are behind investing in Bitcoin, We have asked several CFOs of Spanish companies so you can tell us what you think about this bet from Tesla.
Despite the risk of Bitcoin, Tesla is playing safe
Tesla believes that the value of Bitcoin will grow. This is the only way to understand such a large investment, almost 10% of your reserves in cash. But what may seem like a risky moveConsidering the enormous volatility of Bitcoin, experts believe that this investment by Tesla is perfectly acceptable for the electric car manufacturer.
“They can afford it, for them it is very little. Tesla’s capitalization is higher than that of the rest of the manufacturers. They have the ability to play this game and it is convenient for them to be in the media spotlight“, explains us Pau Fernandez, CFO de Factorial.
Tesla’s situation is very different from that of a startup like the Spanish one. While Factorial relies on VC funding rounds and only has “a couple of dice,” at Tesla they have more leeway. “It all depends on how many bullets you have in the chamber,” summarizes Fernández.
The CFO explains that they also have cash. A money that they seek to invest because banks want to charge for having them deposited, but in the short term and without risk, there are practically no options.
As CFO, they are responsible for ensuring the viability of the company. If the investment goes wrong, the company may suffer. And this is where size comes in. “A startup already has too much risk exploring new business avenues, to get into Bitcoin. Working with 5 currencies is enough complexity for us,” he reflects.
Tesla doesn’t need to look for an extra round of financing. They have a lot of cash and can play with it. “It’s not payroll money.” Their situation is similar to that of large companies such as Apple or Microsoft. To get an idea, Satya Nadella’s company has enough cash to survive two or three years without making any sales. Nevertheless, the investment policy of Apple or Microsoft is more conservative, preferring to buy companies and patents rather than risky financial assets.
Jaime Medina, CEO of The Startup CFO, thinks that it is a risky move, since we are talking about 10% of its cash reserves in an extremely volatile asset. “The news itself has already made the price of bitcoin rise, but it is easy for it to fall below the purchase price again. A 50% drop in the price of Bitcoin would already represent a loss equivalent to Tesla’s total profit before taxes for the last four quarters“.
CFOs believe that Tesla’s investment in bitcoin is not as risky as it represents a manageable percentage and helps it diversify its huge cash reserves.
Jordi Lainz, CFO of Wallbox, believes that the figure is not relevant for the Tesla box and that it is a bet on the diversification of excess cash in currencies, securities or now in cryptocurrencies.
“It’s a super weighted risk and that he is betting on insurance in the short term, “says Lainz.” Tesla is a leader and the price of Bitcoin after its movement has shown it. “A movement that experts believe also has a strong marketing component.
Julius alonso, founder of Weblogs SL and investor, also points out that it is a movement to diversify its reserves, making a somewhat riskier decision in assets such as bitcoin and the rest in dollars or other currencies.
“The worst thing that can happen to you is suddenly that bitcoin, for whatever reason, falls. In that case you have put not much more than 5% at risk, but you don’t go bankrupt. If you tell me that they have put 50 or 70%, then it is much more risky“Alonso explains. A measure that is innovative, but where Tesla has not been the only large company to invest in Bitcoin.
Being Tesla and having that media exposure, the ability to generate value based on expectations is brutal they explain to us. “It is as if they were playing with the marked cards, since they are going to make it rise more. Which mitigates the risk a lot.”
Tesla was aware of the impact that his investment would have on the value of Bitcoin itself. Even so, with their potential rise so clear, they have only invested 10%.
What role could Tesla’s CFO have played in Musk’s decision
On the one hand we have Elon Musk, an outspoken defender of cryptocurrencies and founder of the company, and on the other hand Kirkhorn, an expert in finance and engineering from 35 years with two years of experience as CFO. The decision seems to have fallen entirely on the CEO of Tesla, but it is worth wondering what role may have had the head of the company’s financial area.
“I don’t know if so much in the decision, but obviously it is something where the CFO will have participated. At least on the ticket“, explica Lainz.
It is the case that Tesla is a very one-man company, focused on a media profile such as Elon Musk. The CEO has a strong influence and through him most decisions pass. Unlike other companies, where responsibilities are more shared, the Tesla CEO leads investor conferences, participates in discussions and even sleeps in factories.
“I imagine they have little flexibility of action, but surely the demand is maximum, “says Fernández, in relation to the figure of the CFO. While Tesla’s investment in bitcoin could have been promoted by Musk’s designs, the CFO of Factorial explains that in a company more small there are VCs that put money and as a financial director you have to be accountable.
Tesla has something that other companies do not have and therefore they have been able to make this investment with less worries. “If Elon Musk gets something under his nose, he does it,” says Alonso. It is not so much so in manufacturers like General Motors, where everything is super established, the CFO regulated and you have to sell each decision to the board of directors.
It’s easy for Musk to make such a decision, but other manufacturers have a much more fixed structure, where these types of decisions are widely debated in the boards of directors.
For Tesla it is very easy to do it, but for the rest of the competitors the effort is much higher for the same. A difference that we already saw in their business model when making and selling cars, but which is also reflected when controlling their finances.
Transactional usage is still tricky
The importance of the Tesla announcement was not so much the amount, but rather announcing that they were going to allow its transactional use to buy cars. Open the possibility of selling and / or buying Tesla in Bitcoins, giving a material value to these cryptocurrencies. But experts lower expectations.
Using Bitcoins to buy cars would pose an operational risk, “unless they have plans to “bitchonize” their supply chain“, explains Lainz. At this point, it is not the same that all operations are done in Bitcoins, than simply accepting the cryptocurrency and immediately converting it to dollars. This second way would be much simpler and would not have as much impact.
The decision to accept payments in bitcoins is not that difficult for companies to make. The big difference is whether the entire supply chain is produced in bitcoins or if they are simply changed to dollars in the moments after purchase.
“In itself the acceptance of Bitcoin as a form of payment is more of an image move than a financial decision. Despite Bitcoin’s volatility, if prices are permanently updated according to the exchange rate and the company changed the money received to dollars immediately, Tesla would not take any risk exchange rate. However, it is a decision that helps the image of Tesla as modern and even futuristic, “explains Medina.
Elon Musk is confident in new distributed technology and the idea is appealing. Experts remind us that Musk comes from Paypal, eBay and has a great interest in the financial world. This investment can be understood as a “first stone”, a “bet” or a “game”, according to some terms used by the consulted CFOs.
If at a given moment, a company admits Bitcoin to make an operation, but as they enter they are changed to dollars, that does not have much risk, explains Alonso. The point is that Tesla sells directly, while other manufacturers do so through dealers and these would have to adapt to accept Bitcoin. It’s a different way of working that again makes it easier for Tesla to make this type of bet.
“The transactional use is complicated, the problem is that its value is not stable enough to use it as a bargaining chip. If you think it will continue to rise, why would you use it to pay? Better to pay in euros and continue to hold Bitcoin, “says Alonso.
Experts understand bitcoin as a store of value asset, similar to gold. But until it stabilizes, it seems difficult for them to play a relevant role when it comes to acquiring goods. Musk’s announcement would therefore be understood more as a financial security to increase the coffers and not so much as an actual attempt to boost Bitcoin as a currency to buy.
In practice, the expectations are that bitcoin will eventually prevail, but financial managers are still not clear about what they can contribute to their company. As Fernández puts it: “I think that it will end up paying in bitcoins, but I have no idea when or how. At the moment, no customer has ever asked us to pay in bitcoin“.
Image | Many Becerra