Back in February 2021, Elon Musk made headlines when he announced on Twitter (TWTR) that his electric car company, Tesla (TSLA -0.52%), would buy Bitcoin (BTC 0.98%) as an alternative to cash. At the time, many viewed the purchase as one of the most significant events in Bitcoin's short history. The $1.5 billion purchase of Bitcoin caused a frenzy of buyers to pile in and drive the price of Bitcoin up nearly 20% in less than 24 hours.
Tesla and Musk are now back in the spotlight for the same Bitcoin bought over a year ago. In a quarterly earnings call, Musk disclosed that Tesla sold 75% of its Bitcoin holdings. He cited that the company faced a need for liquidity amid uncertainty in its Chinese operations due to extended COVID-19 lockdowns. With supply chain disruptions and labor shortages, the company needed cash on hand to ensure the disruption in production didn't have as large of an impact.
The announcement caused Bitcoin to dip slightly, but it regained those losses quickly after Musk further clarified his comments. He mentioned that the sale "should not be taken as some verdict on Bitcoin" and that the company would look to increase Bitcoin holdings in the future.
As one of the most prolific entrepreneurs and richest men in the world, any purchase or sale of Bitcoin draws considerable attention from the public. Even more attention is brought about when a sale occurs. However, it seems as though the decision to sell the Bitcoin was potentially the right move for the company.
The real reasons behind the sale
Although Tesla made the announcement of the sale just last week, the company actually sold roughly 31,500 Bitcoin at a price of roughly $30,000 some time back in May. The sale allowed Tesla to secure cash it badly needed and avoided the worst of the losses when Bitcoin fell below $19,000 this July. Had Tesla not sold when it did, the company would have lost about $11,000 per Bitcoin or roughly $346 million. Likely due to some good timing and a little bit of luck, the company only reported a loss of $106 million by selling at $30,000 instead of around $19,000.
Tesla is the second-largest electric car company in the world, only recently losing the title as No. 1 this July. The lockdowns caused some of its largest factories in cities like Shanghai to shut down for over a month this spring. This type of hit to production forced Tesla to find new means of cash. Without selling the Bitcoin, the most recent earnings report would have likely been one of the worst it had in quite some time. During normal production, Tesla usually sells roughly 60,000 vehicles in China per month. Despite selling a record number of cars in June, roughly 70,000 fewer cars were sold in the second quarter compared to the first quarter.
By selling its Bitcoin, Tesla was able to bolster its cash reserves and lessen the blow from lockdown-affected factories in China. Ultimately, it might have been the right move to ensure that any further impacts from the lockdowns were minimal and wouldn't damage Tesla's bottom line for Q2. It seems as though the decision was an attempt to minimize the damage that would have inevitably shown up on Tesla's earnings report. While production numbers took a hit, Tesla was able to offset this with an increased amount of cash on its balance sheets. While it's not always ideal to sell an asset for short term reasons, it seems to have worked in this case -- especially considering that after the earnings announcement, Tesla's stock was up about 10%.