The Breakdown - Elon Musk Buys Bitcoin: Everything You Need to Know About Tesla's $1.5B Purchase

Episode Date: February 9, 2021

Elon Musk’s Tesla (TSLA) has purchased $1.5 billion in bitcoin as a treasury reserve asset. Additionally, the company will soon be allowing people to pay for Teslas with bitcoin.  In this episode, NLW breaks down: How Elon got to this moment, including his exchanges with MicroStrategy’s (MSTR) Michael Saylor What critics of the Tesla community and the bitcoin community are likely to say  How this de-risks bitcoin purchases for other Fortune 500 companies  How it relates to Elon’s doge memeing  Why this is likely to have a significant impact on bitcoin’s narrative regarding climate change and energy use  Why Cathie Wood is laughing all the way to the bank. -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

What we're at the beginning of now is an entire flippening, where it's not only not risky for professional money managers to have Bitcoin exposure, it's getting increasingly risky for them not to. In fact, at this point, every money manager that gets into Bitcoin now or gets their clients into Bitcoin now officially did it after the world's richest man did. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Monday, February 8th, and oh my God, what a way to start the week.

Tesla has bought $1.5 billion worth of Bitcoin. At this point, I know you've heard the news, and so what I want to it to do today is dig into it, what the implications are, what the discussion is like, what I think we'll see next, where it goes from here. So let's dive in. First of all, let's read the actual SEC filing. It says, we hold and may acquire digital assets that may be subject to volatile market prices, impairment, and unique risk of loss. In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, which was duly approved by the Audit Committee of our Board of Directors,

we may invest a portion of such cash in certain alternative reserve assets, including digital assets, gold bullion, gold exchange traded funds, and other assets as specified in the future. Thereafter, we invested in aggregate 1.5 billion in Bitcoin under this policy, and may acquire and hold digital assets from time to time or long term. Moreover, we expect to begin accepting Bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt. Okay, so there are two obviously big things going on just in this one paragraph that I just read. The first is the treasury asset dimension of this.

The second is the payment dimension of it. Let's actually do with the second one first. Now, in many ways, the payments narrative is dramatically less significant now because we've shifted so fully away from it. This whole run-up of Bitcoin, this whole institutional phase, this whole new cycle is largely predicated on the understanding of Bitcoin as an inflation hedge, as a store of value, as a type of digital gold that also has upside, versus something that you use to pay for your coffee with. However, for those who do want to hold on to that Bitcoin's not useful because you can't pay for things with it type of thinking, it's getting harder and harder. First of all,

there's this, right? This shows clearly that big companies feel like it's important to actually have this as an option, especially the most innovative companies whose focuses on where the world is headed. Second, you have places like Miami under Mayor Suarez that are trying to push to figure out how to accept Bitcoin for fines, fees, etc. A whole additional use case for payment. Third, and finally, you have PayPal last week confirming that this, quarter, they'll start rolling out the ability for their global network of 26 million plus merchants to accept crypto. And the point of all this is that it's almost an afterthought at this point, which is what, frankly, people and Bitcoiners who talk about monetary evolution and

moving from stores of value to mediums of exchange always told you would happen. Obviously, more significant is the treasury dimension of this. Last fall, when Michael Saylor and Micro Strategy opened up the floodgates on Bitcoin as a treasury asset for publicly traded corporations, it wasn't exactly clear who was going to come next. Would there be more dominoes? Not long after Micro Strategy made their move, Square came in with their own investment in Bitcoin. However, since then, it's been more bubbling and brewing behind the scenes. Last week, obviously, Michael Saylor and Micro Strategy held their Bitcoin for Corporations Conference, which had something like 1,400 corporate officers from a variety of different companies,

including, by the way, SpaceX, there to learn about exactly how micro strategy had executed thereby and maybe some of the motivations for it as well. Sailor and Elon first connected at least publicly last December. On December 20th, Elon tweeted out the meme of the monk praying to get strength in the face of, shall we call it, a harlot who is tempting him with Bitcoin the harlot and me trying to live a normal productive life, the caption on the monk. The implication, of course, was that Elon was getting really interested in Bitcoin and he wanted to stop paying attention to it. Michael Saylor chimed in and said, if you want to do your shareholders

a $100 billion favor, convert the Tesla balance sheet from USD to BTC. Other firms on the S&P 500 would follow your lead and in time it would grow to become a $1 trillion favor. Elon Musk responded, saying, are such large transactions even possible? To which Saylor said, yes, I have purchased over 1.3 billion in Bitcoin in past months and would be happy to share my playbook with you offline, from one rocket scientist to another. Fast forward to over the last couple weeks, on January 29th, Elon Musk changed his Twitter profile to a single word, Bitcoin, and also tweeted out, in retrospect, it was inevitable. Bitcoiners the world overthought and maybe a little bit hoped that something like this was coming. There is absolutely tons to unpack, and so first,

let's talk about just how significant a position this is. We've had two very different models at two very different extremes. Micro Strategy not only spent basically all its cash on Bitcoin, it even took on hundreds of millions in additional debt to acquire more. This has worked out exceedingly well for them. On the other end of the spectrum, Square, the other non-fully crypto public company to allocate treasury to Bitcoin as a reserve asset, allocated only 50 million closer to about a percent of their reserves. Now, a number of people in the industry pointed out when Square announced its commitment, some people like Ryan Selkis from Masari actually pointed out that the Square move could be as or even more important as it gave CFOs from other public

companies a more reasonable template to work with, as in a CFO bringing to their CEO or board the idea of putting all of their cash reserves into Bitcoin a la Michael Saylor and MicroStrategy might be laughed out of the room, where putting a small allocation in might be something that was much more feasible. Tesla's position is in between. According to their most recent filings, they had gross cash of $19.4 billion and net cash of $9.8 billion. That means the $1.5 billion they put in Bitcoin is 7.7% of gross cash or 15.1% of net cash, which are meaningful positions. Now, what about what the markets think? Tesla is up, but barely. Micro Strategy is up more than 16% in pre-market trading. This suggests to me that people think that the impact is going to be more

on the Bitcoin side than it is on the Tesla side. And certainly that seems to be the case. Bitcoin has been having an absolutely insane morning getting to nearly 45,000 at one point with a huge amount of volatility. I've seen tons of reports of exchanges experiencing outages as people log in, and I'm also hearing that over-the-counter desks are reportedly being absolutely lit up by exchanges trying to get their hands on more BTC to satisfy demand from customers. Now let's shift and talk about interpretations and implications. There are effectively no two internet slash financial communities with more intensely devoted adherence than Tesla and Bitcoin. To those on the inside of these movements, this is an incredible source of strength.

This is embodied in labels like Michael Saylor calling Bitcoiners cyber hornets. Of course, to those on the outside, this can lead to critiques and accusations of some sort of cult-like behavior. In some ways, this is even worse for Tesla, right? Bitcoin's originator is off the scene. He's gone. He's in the wind. We don't even know if he's a he because they were anonymous when they created Bitcoin.

Tesla's messianic figure is there all the time in living color messing with people on Twitter. Elon likes to press buttons and see how absurd he can make things. And to those outside, this move could only contribute to that view. And by the way, when Deutsche Bank did a survey last month about the most bubbly assets, Tesla was the only one above Bitcoin. All that said, there's also a flip side to this. There is potentially a joining of the tribe's moment where those extremely passionate groups co-mingle.

More specifically, I think this could bring Tesla people farther into the Bitcoin fray, which, as we've seen, clearly represents a huge buying block. And frankly, I think that this is part of a larger trend. The Tesla cohort is highly overlapping with the Wall Street bets crowd. Indeed, Tesla was one of their bets that the professionals told them they were stupid for investing so much in, an accusation that they've been laughing all the way to the bank around ever since. given what has transpired over the last couple weeks as it relates to GameStop and market shutdowns and Robin Hood access, one of the things that we've been seeing is at least some number of that Wall Street Bet's retail Robin Hood crowd looking over to crypto markets and saying there's much less room

for at least centralized manipulation by exchanges in that type of space. Maybe if we really want to fight the system, we should be looking to something that is entirely. outside the current system. Anyway, the point here is that there's potentially a big group of buyers that could come in from this shift. All that said, though, I think it would be reductive and wrong to only view the upside as those existing, loud, passionate set of Tesla buyers coming in. As much as traditional financial media and vocal critics want to tear apart Tesla and Bitcoiners for their insular behavior, for their bubble-type nature, the market has over and over and over again

proved those critics wrong. Looking for the best way to stay on top of your investment game, nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.io. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax,

and earn up to 12% comment. compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. Elon Musk is the world's richest man. That's not because he memes. Okay, maybe it's a little bit because he memes, but mostly it's because his company,

well, his companies really, are extremely valued by the market. Simply put, he and Tesla, like Bitcoin, have proven the haters wrong over and over and over again. And let's not forget, when it comes to Tesla, people can make any critiques that they want about how the markets are out of whack and price-to-earnings ratios don't make any sense in market extremes, but people who own Tesla's absolutely love them. This is not a meme stock in the same way that a dead theater company might be or an offline game store might be to some people.

What that all means is that there are going to be a lot of people, a lot of market participants who have either been on the edge with Bitcoin or even who aren't intrinsically all that interested, who feel like maybe it would only be responsible to just get a little bit of exposure. Which brings us to the next point about precedent. I talked last week with Travis Kling about career risk, or more specifically, how over the last few years, Bitcoin participation has been significantly derrisked when it comes to people's careers. What we're at the beginning of now is an entire flippening, where it's not only not risky for professional money managers to have Bitcoin exposure, it's getting increasingly risky for them not to.

In fact, at this point, every money manager that gets into Bitcoin now or gets their clients into Bitcoin now officially did it after the world's richest man did. They will never get to say that they beat Elon and Tesla to the punch. Along those lines, you have to feel like other publicly traded companies, particularly tech companies, might be fielding a whole lot of calls from investors and board members saying, Hey, what's our Bitcoin strategy? Austin Reef from Morning Brew tweeted this morning, Elon Musk just bought $1.5 billion in Bitcoin.

In doing so, he just gave cover to every other Fortune 500 CEO to do the same. If Elon did it, so can I. This is going to start a domino effect, starting with CEOs who are most trusted by their shareholders. Okay, just a couple more dimensions to pull into this. Let's talk first about Elon's Doge meaming. If I've seen Bitcoins angry about one thing, it is how much Elon has been pumping Doge over the last few days. There are literally, I think, a dozen tweets at this point about him jokingly, or seemingly jokingly, pumping Doge coin. Now, I said in a tweet, and I think on this show, that in some ways to me, Doge at this point is just a big middle finger to those market

fundamentals type people that I was talking about before. It is an asset that is, strictly speaking, a mean come to life that is nothing, literally nothing, except the people who buy it. It is a pure manifestation of the internet. It feels to me like Musk's appreciation of it comes on that level. It's a giant FU to everyone who thinks that markets have to represent some fundamental value, rather than simply being representative of what people decide they like and want to be a part of. I'm sort of of two minds about the being angry about him pumping it thing. On the one hand, it absolutely blows me away that people don't get that this is a joke, that this is a meme, that people actually listen and buy it as though it's going to be some big financial opportunity for them.

In an ideal world, there would be some sense of personal responsibility, and there simply wouldn't be these people like Elon told me to do it and he ruined me. It just strikes me as absolutely insane. This was actually captured really well by Sid Verma from Bloomberg who tweeted Elon Musk says, see you later, alligator. Twitter says, ha ha, OMG, outrageous, let's buy some alligators. So that's the one side. On the other hand, people do end up doing this.

They do end up buying a bunch of crap and saying Elon told me so. And it ends up screwing up people's lives and it ends up screwing up the industry and making us justify it and fight it. So I certainly approve of Bitcoiners holding feet to the fire on that, even if they shouldn't have to because people should be smart enough to see that this is a big friggin' meme. Second, though, and I think much more important in terms of the real implications of this, is the discussion around the environmental impact of Bitcoin. This certainly hasn't hit a fever pitch yet, but it's creeping. And there is a context of this Biden administration that makes

me think that it's likely to creep more. One of the main mandates that the Biden administration feels like it has is to undo what it perceives as the damage done to environmental policy over the previous administration's four years in power. When I watched what Wall Street's response to Gary Gensler being named chairman of the SEC was, their focus and their concern actually had a lot to do with what new rules he might put on them as it relates to environmental impact. In that context, it would not surprise me at all if, as Bitcoin becomes a bigger part of the financial discussion at these highest regulatory levels, a big question was around environment and environmental impact. Now, of course, for Bitcoiners in the space, we know that there are tons of counterpoints.

First, on the most broad philosophical level, who gets to determine what is and isn't valuable to spend our resources on, to spend our energy on? But let's hold that one aside because it may be a little bit too philosophical for our vaunted leaders. Or rather, their answer might be, it is us who gets to determine what is and is invaluable to spend our energy resources on. So a second counterpoint is the percentage of Bitcoin mined with renewables, which is large and growing. A third counterpoint is the comparison of cost to the current petrodollar system. Part of what makes Bitcoin so unique relative to other assets is how transparent it is that you can actually understand the impact.

It's not really fair to castigate it for energy usage when other systems could be using as much or more, they're just totally doing so in an opaque way. Fourth and the most exciting one for me is the incentive that Bitcoin creates to actually go capture energy sources that would otherwise be lost, natural gas that would otherwise be flared off, hydroelectric power that can't make it onto the grid but could be captured and used in close proximity. We're already seeing this start to happen. We're seeing companies spring up around it. people like Ross Stevens from Stone Ridge and Nidig who spoke at Sailor's Conference last week are talking about this. The point of all this is that there are so many good counterpoints to the

Bitcoin energy conversation. It's really just the top line critique that's scary to people. Once you dig in, there's a lot there that makes Bitcoin look much more appealing. But as much as we would like it to not be the case, it feels very possible, like I said to me, that this energy argument becomes a central part of the discussion as it relates to Bitcoin and the current U.S. administration. So the question is, how does this purchase change that, if at all? I was in a reaction clubhouse this morning, and Meltem DeMiris had a great quote. She was basically saying that Tesla is a company that's all about reconceptualizing how humans use energy,

and Bitcoin is about reconceptualizing how humans use energy as well, which I thought was a really brilliantly simple way to put it. I went to Twitter and I asked a question, How does Tesla buying Bitcoin change the climate narrative? Is it one, it makes people question assumptions about Bitcoin's negative impact? Two, it makes people question Tesla's commitment to environment, or three, it's complicated. I've certainly seen a number of tweets around number two. It makes people question Tesla's commitment to environment.

But one, you would sort of expect that. And two, it's mostly from the usual suspects of people who simply don't like Tesla in Elon. In the poll, that answer only got 12. 4% of votes. The winning answer was number one. It's going to make people question their assumptions about Bitcoin's negative impact. 44.9% of more than 400 voters said that that was the biggest impact. Now, it's complicated was not far behind with 42.7% of the vote.

For my part, I think the bad side is that this is almost guaranteed to increase this category of fud, to put this category of fud back on the map. However, I think net net this move is a big positive for it. Specifically, I think a lot of people are going to ask, why would an environmental company be into this asset that I've heard is so dirty and so consumptive? And that opens the door for exactly the type of conversations about all those really interesting points above, which is where we want this conversation to be. There's going to be so much to unpack about this Tesla purchase of Bitcoin in the coming days in the coming weeks. I'm really interested to see how other CEOs respond for us to get our first

hints of what phone calls were being made behind the scenes for people to try to race and catch up. It's going to be fascinating. But for now, I wanted to end on just one more shout out. I tweeted earlier, it's Kathy Woods World and we're all just living in it. And oh my goodness, this is a woman who was more convicted around Elon and Tesla than anyone else on Wall Street for the longest period of time and has seen that proven extremely valuable. This is a person that had one of the funds with real exposure to Bitcoin all the way back in 2015. This is a firm in ARC that has had people like Chris Berniske, who's obviously now an important venture capitalists in the crypto space, come up through their ranks. I've talked before about how insane ARC's ETF performances

are and how it's just dominating ETF inflows around innovation. But talk about someone who has just been consistently right. There is a silly thing that we do where we want to talk about goats, right? We want to talk about greatest of all times. We're recording this the day after the Super Bowl as Tom Brady just won his seventh. When it comes to investing, the way that this question is framed is always, who's the next Warren Buffett? If you watch Twitter and mainstream media, there are two names that get shouted out for this. One is Chamath. The second is Kathy Wood. You've got to think that with today's moves in Tesla in general, Kathy is in the lead.

But I think more importantly than that, both of them bought Bitcoin a really long time ago and have held it ever since. I'm excited to hear what you think about this. Hit me up on Twitter in the YouTube comments. If you're on Clubhouse, I'm sure I'm going to be there chatting about it too. It's a crazy day. You should be as excited as you are. And until tomorrow, be safe and take care of each other. Peace.