In a filing to the Securities and Exchange Commission in February, Tesla (TSLA -1.37%) revealed it made a $1.5 billion investment in the high-flying cryptocurrency Bitcoin (BTC 1.54%). It sparked a widespread debate about whether other companies should have exposure to crypto, as a hedge against rising inflation and a weaker U.S. dollar.
There were concerns, though, about Bitcoin's volatility and the possible effect that might have on Tesla's earnings -- after all, it's a car manufacturer that has struggled to generate meaningful profits from its core business. It didn't take long for this to become reality -- in the very same quarter that Tesla purchased Bitcoin, it sold some for a profit, positively adding to its net income for the period. With cryptocurrencies falling hard and fast in recent weeks, Tesla could be facing a real Bitcoin problem in its future earnings reports.
The crypto crash
On May 8, Tesla CEO Elon Musk famously hosted Saturday Night Live, after spending months promoting cryptocurrencies like Dogecoin and Bitcoin. This whipped prices into a frenzy, as investors accounted for the notion that Musk could say something to further bolster prices -- or that the appearance would help bring crypto into the mainstream.
On the night of the show, Bitcoin traded near $60,000 -- and it has been down ever since.
Tesla's purchase of the cryptocurrency had a two-pronged goal. It liked the investment case (and therefore expected it to rise in value), but it also began to accept Bitcoin as payment for its electric vehicles. That all changed on May 13, as Musk bowed to public pressure about the carbon emissions produced by Bitcoin mining, and announced Tesla would no longer accept it as payment -- but he clarified that the company was not selling its holdings.
This corporate drama, combined with an announcement from the Chinese government that it would ban financial institutions from providing crypto-related payment services, sent prices nosediving.
Since Musk's appearance on SNL, Bitcoin is down over 42%.
Tesla's precarious position
According to its earnings release for the quarter ending March 31, Tesla still owned $1.331 billion worth of its initial Bitcoin purchase. This was down slightly, as the company sold $272 million worth of the cryptocurrency for a tidy $103 million profit. The $1.331 billion represents the company's cost-base (its value at the purchase price), but at the Bitcoin price on March 31 of $58,900, the company's position was actually worth $2.48 billion.
The $272 million sale was a big contributor to the company's $1.05 billion in net income, accounting for almost 26%.
This raises some valid questions. On March 31, Bitcoin was trading much higher than at any point in January when Tesla made its purchase. Today, it sits at $34,500, a fall of more than 41%. Applying this to Tesla's known holdings, it would mean its $2.48 billion position is now worth approximately $1.463 billion-- a whopping billion-dollar drawdown.
These swings highlight a really important issue about the financial stability of crypto. If Bitcoin fell another 41%, for example, Tesla's position would be worth just $846 million, representing an actual loss of $467 million. If the company sold at that point, the loss would be big enough to wipe out almost half of last quarter's net income result. It would almost be enough to completely erase the $518 million Tesla received for selling regulatory credits to its competitors -- a key source of income. Tesla receives these credits from the government as an incentive to reduce carbon emissions, and sells its excess supply of them to other car manufacturers who need them to avoid penalties.
In the somewhat unlikely event that the Bitcoin experiment fails completely -- and it went to zero -- Tesla's $1.331 billion loss would be enough to wipe out almost two full quarters of net income, assuming results similar to Q1.
Investors might be wondering at this point whether the revolutionary car manufacturer should be susceptible to an asset that has nothing to do with its business. Tesla continues to struggle to generate meaningful earnings from making and selling cars. Of the $594 million in operating income in Q1, less than $100 million came from that core business -- the rest was generated through the sale of regulatory credits.
It appears the Bitcoin saga offered a distraction from these realities, and while the price was rising, it was a win for Tesla stakeholders. Now that the chips are down, the company might find it appropriate to move on from the controversy, and focus on what it does best.
After all, with multiple gigafactories in progress, Tesla has more exciting things to use to grab investor attention.