Elon Musk on Inflation, Why Tesla Sold Its Bitcoin Holdings

Tesla Inc. has sold most of its holdings in Bitcoin, an investment that has contributed to embracing the world's largest decentralized electronic currency.

According to a letter to shareholders regarding the second quarter's financial results, the car manufacturer converted about 75% of its Bitcoin, as of the end of June, into inconvertible paper currency and added $936 million in cash to their balance sheets. In a conference call with analysts, CEO Elon Musk said the company had sold because of uncertainty about when the Covid shutdown would be lifted in China.

"This should not be taken as a verdict against Bitcoin" - Elon Musk

"This should not be taken as a verdict against Bitcoin," Mr. Musk said. "Given the shutdown of China during Covid, we were just concerned about the liquidity of the entire company. "

Elon Musk's Support for Crypto

Mr. Musk tweeted favorably about Dogecoin last year and posted a photo of his dog Floki, who is a Shiba-Inu like the Dogecoin mascot, which emerged as the leading influencer in cryptocurrencies. A drone show displayed the Dogecoin image during a Tesla-hosted party at its new Austin plant in April.

During his appearance at the Bitcoin conference a year ago, Musk said that he owns three cryptocurrencies privately outside of Tesla and SpaceX: Bitcoin, Dogecoin, and Ether. He followed up with, "I might pump, but I don’t dump."

Tesla first announced in February last year that it had invested $1.5 billion in Bitcoin and announced it had sold 10% of its stake two months later. Tesla announced in June that its digital assets had shrunk to $218 million and that Bitcoin losses had reduced its second-quarter profitability.

Cryptocurrencies have retreated from a record high of nearly $69,000 in November. The largest cryptocurrency Bitcoin is trading at around $23,947, down significantly from its all-time highs.

After Tesla’s purchase of Bitcoin at the beginning of last year, Mr. Musk's acceptance of the token became a trigger for the digital currency to climb. However, the company then suspended the payment option due to environmental concerns about the mining process. With the further downturn, one of the most prominent bulls in the crypto sector is showing a hawkish move during the current "crypto winter."

Still, Mr. Musk has continued to position himself as a crypto proponent, hinting in the past that SpaceX might embrace Dogecoin with Tesla for future product purchases. Fang told reporters at a briefing on the company's financial results that he had not sold any Dogecoin vehicles.

Josh Olszewicz, research head of crypto fund manager Valkyrie Investments, said that Tesla's Bitcoin sales were at a price level of $30,000 on a rough estimate, and the balance sheet digital assets remained at $218 million.

"I think this decision was due to the combination of a strong bearish market so far this year and the balance sheet cash requirement," Olszewicz said. "From a financial management perspective, in the short term, volatility in the fall would have been irresistible."

Tesla's Current Crypto Position

At one of Tesla's 2022 shareholder meetings on Aug. 4th, Elon Musk predicted that the coming U.S. recession would be "mild to moderate."

Having recently sold almost all of its $1.5 billion BTC, Tesla is witnessing an economic boom with a thriving risk asset. In the question-and-answer session of the annual meeting, Musk said the six-month commodity prices of Tesla parts were already lower, not higher.

It is said that commodities are on a downward trend, suggesting inflation is already at peak levels. The recovery from the inflationary period, when commodities are heading for a downturn, provides fertile ground for the recovery of risk assets, including crypto. In theory, this comes as a result of low inflation, which implies a reduction in the Federal Reserve tightening and provides favorable conditions for risk-on investment.

If strength returns to the markets and Bitcoin outperforms, for Tesla, which sold virtually all its BTC exposure last month, this flow would be ironic (achieving a profit of only $64 million).

At the time, Mr. Musk added that BTC could return to the company's balance sheet at a later date and that this decision was not a comment on Bitcoin itself.

The Fed's general meeting showed more optimistic macro-economic forecasts, including a "relatively mild" U.S. economic downturn that could last about 18 months. Inflation is "falling fast," Musk added.

Effects on Crypto and the Industry

Tesla's move is likely to intensify the debate over the role of cryptocurrencies in corporate treasury management. For companies with large cash holdings, the investment provides a way to hedge against inflation and generate returns that outperform other assets such as bonds.

The move by Tesla is significant because it's one of the biggest and most influential companies to have invested in cryptocurrencies. Its actions alone could cause the prices of Bitcoin and other digital currencies to drop further.

What do you think about Tesla's move? Do you think crypto will rebound? Let us know on Twitter!

Disclaimer: The information in this article is for informational purposes only and should not be considered financial advice. Always consult a financial advisor before making any investment decisions.