Elon Musk & Bitcoin: Corporations Shouldn’t Follow Tesla’s Lead

    SpaceX founder Elon Musk speaks at a news conference after the SpaceX Falcon 9 rocket carrying the Crew Dragon spacecraft lifted off on an uncrewed test flight from the Kennedy Space Center in Cape Canaveral, Fla., March 2, 2019. (Mike Blake/Reuters)

    This month, Elon Musk announced that Tesla had bought $1.5 billion of Bitcoin, totaling about 3 percent of the firm’s assets as of December 2020. Tesla’s decision led some television commentators such as Jim Cramer to suggest that more CEOs should add Bitcoin to their corporate balance sheets.

    In reality, the speculative cryptocurrency has no role in corporate treasuries. For one, it’s almost certain that very few if any consumers are purchasing products with Bitcoin. Even if some customers were using Bitcoin, Tesla and others would be better off hedging their Bitcoin risk rather than adding to it, given the cryptocurrency’s immense volatility (it declined 75 percent against the U.S. dollar in 2018 before gaining 300 percent in 2020).

    Why should companies hedge? Investing in an extremely volatile asset that is nowhere close to being a serious medium of exchange increases the volatility of that corporation’s equity. In other words, it makes that company’s stock price more volatile.

    Those who argue that Bitcoin protects them from inflation amid ongoing stimulus and risks of the economy overheating should know that Bitcoin is also a terrible inflation hedge. The correlation between Bitcoin prices and inflation expectations (from Treasury inflation-protected securities) is close to zero.

    For what it’s worth, the notion that Bitcoin is tantamount to digital gold is also false. The correlation between daily Bitcoin prices and daily gold prices is close to zero. Gold hasn’t been a particularly great inflation hedge in recent decades, although gold prices did rise in the 1970s and 1980s. (Treasury inflation-protected securities issued since the 1990s offer a far superior inflation hedge given that their coupon payments are tied to CPI).

    While many point to the fact that PayPal now accepts Bitcoin as evidence that the digital currency “is going mainstream,” they should instead look at how many vendors quote prices in Bitcoin. The answer is next to none, given the immense volatility of Bitcoin exchange rates.

    As long as most product prices are not denominated in Bitcoin and most individuals do not keep a significant portion of their assets in Bitcoin, corporations and individuals alike should avoid much exposure to a highly volatile asset. Not to mention that Bitcoin is almost certainly in a retail bubble not unlike what we saw recently with GameStop stock.

    It seems like Elon Musk is now adjoining two of the most significant bubbles in recent years (Bitcoin and Tesla), which is not only completely unnecessary but also incredibly dangerous, treating Tesla’s corporate treasury (meant to keep some cash on hand for hard times) as a casino. Other corporations would be highly unwise to follow suit.

    Jon Hartley is a master’s student at the Harvard Kennedy School and a Visiting Fellow at the Foundation for Research on Equal Opportunity. He formerly served as a senior policy adviser to the Congressional Joint Economic Committee.

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