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MicroStrategy, Tesla, Bitcoin – A Story of Greed and Irrational Market Behavior


Posted: Thursday, February 25th, 2021

Estimated Reading Time: 4 minutes

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February 2021 brought some exciting market developments. While the U.S. dollar’s decline continues, signs of irrational market behavior are everywhere. MicroStrategy and Tesla, two publicly listed companies, announced investments in Bitcoin at staggering valuations.

MicroStrategy made headlines last year when it announced that it converted its treasury reserves from dollars to Bitcoin. At the time, the move seemed reckless, as Bitcoin struggled to hold above $10,000.

In the meantime, Bitcoin rose above $50,000, reaching as high as $58,000 recently. Therefore, MicroStrategy’s move appears inspired in hindsight.

MicroStrategy Tesla Bitcoin

Other Publicly Listed Companies Switched to Bitcoin

What followed was truly remarkable. PayPal, the online payments giant, announced the introduction of Bitcoin and some other altcoins on the platform. Square, another publicly listed company, announced a $50 million investment in Bitcoin.

It was enough for Bitcoin’s hodlers to get excited and for the price to bounce. So it did, triggering stops after stops.

Tesla Invested $1.5 Billion in Bitcoin This January

February started with a bang. Tesla, investors’ darling in 2020, announced a $1.5 billion investment in Bitcoin. It acquired the coins throughout January when the price of Bitcoin hovered anywhere between 30k and 40k.

Naturally, the announcement sparked another rally. Only this time, it was the first sign of trouble for the electric vehicle manufacturer.

The problem with Tesla’s announcement comes from its profitability. It does not make a profit from producing and selling cars. Instead, it does make a profit from selling carbon credits to competitors.

Sense the irony here. Bitcoin consumes tremendous amounts of electricity, and the primary source for it remains fossil fuels. Hence, Tesla’s investment in Bitcoin makes the company no greener than a traditional energy conglomerate.

Tesla Bitcoin News

Moreover, by investing shareholders’ money in Bitcoin, Tesla gambles the company’s future should the price of Bitcoin collapse. Is this the reason why investors supported Tesla all these years? I highly doubt it.

Janet Yellen Slams Bitcoin

Fast forward to this week, and cryptocurrencies were slammed by non-other but the former Fed’s Chair, Janet Yellen. Speaking as the new U.S. Treasury Secretary, she slammed Bitcoin in particular, saying that it is mostly used for illicit transactions.

Moreover, she insisted that it has little or no other uses. Furthermore, she pointed out that market bubbles form like this and that Bitcoin electricity consumption is outrageous.

Square Bitcoin Investment

The speech triggered some significant moves in the cryptocurrency market. Bitcoin dropped over 20% in less than two trading days. It fell all the way down to $46,000 before bouncing – so much for the store of value every fan hopes for.

Because of the investments in the cryptocurrency mentioned earlier, the move lower in Bitcoin poses systemic risks. Think of the S&P500 index. It added Tesla to its composition in the last half of 2020 – the most significant addition ever.

Tesla’s share price collapsed from $900 to $621 in a matter of days. Why? Hint – because of Bitcoin’s collapse. Now, what changed in the way Tesla does business? The only thing that comes to mind is Bitcoin’s investment.

Earlier this week, Jerome Powell, the Fed’s Chair, testified in front of the Senate Banking Committee. His remarks, as well as the ones from Tuesday, pushed the Dow Jones to new all-time highs. However, the S&P500 did not make a new high, as Tesla weighs.

Square Announces Another Investment

Just when the world was watching Bitcoin trading at $46,000, Square announced that it purchased another $150 million worth of coins in the past month. Considering the prices in the period, the estimate is that Square bought the new coins for an average of about $52,000.

Already at the time of the announcement, the investment was in the red – but who cares when the plan is to have “diamond hands” and hold forever? After all, Square’s CEO, Jack Dorsey, is a big fan of Bitcoin, so the investment comes as the next logical step after the initial one.

The announcement did the trick. Bitcoin found a bottom, bounced from $46,000, and recovered the lost ground all the way to $52,000. Mission accomplished.

MicroStrategy Adds to the Bitcoin Bullish Bet

Yesterday, MicroStrategy announced that it purchased another 19k Bitcoins for an average price of $52,765 – in cash. Rumors have it that it borrowed the cash to pay for the coins, and that is where the greed steps in.

Greed and Irrational Market Behavior

It is one thing to bet your house (i.e., the company’s treasury reserves) on speculative bets; another one is to double down with borrowed money. Suddenly, it does not matter anymore what MicroStrategy’s main business activity is – investors buy its shares to gain exposure to Bitcoin. They might as well sell their shares when the Bitcoin price declines, and they will likely will.

Conclusion

By investing in Bitcoin, companies like MicroStrategy, Tesla, or Square, converted themselves into vehicles for Bitcoin investments. Retail traders don’t need to own Bitcoin anymore, but a piece of MicroStrategy, Tesla, Square, will offer similar exposure to Bitcoin’s price action.

MicroStrategy fears inflation – so it considers Bitcoin as the perfect hedge. Square acts in line with its CEO’s beliefs.

How about Tesla? I guess we’ll have an answer soon enough.

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