Auto company Tesla announced a $ 1.5 billion investment in cryptocurrency bitcoin. Not only this, the company also said that it plans to accept bitcoin as a price for its cars in the coming times. There are several aspects to this announcement. The biggest among them is the recognition of bitcoin. Until a year ago, there was a demand to ban bitcoin across the world and there are still reports in India that the government is going to bring a law to ban it. At such a time, Tesla’s confidence in bitcoin is such news, which has filled the cryptocurrency investors with enthusiasm.
This excitement can be gauged from the fact that within 24 hours of Tesla’s announcement, the price of bitcoin rose from US $ 39,400 to a peak of US $ 48,000. Although it is not clear at what rate Tesla bought bitcoin, it is estimated that it has made a profit of $ 500 million on its investment in just a few days. The importance of this amount can be understood by the fact that when Tesla made annual profit for the first time in 2020, it was $ 700 million. But this is just one aspect of the picture. We will discuss the other aspect in the article further.
Before that it is important to understand what is the reason for this decision of Tesla and whether it is an isolated incident or a link to some event? It is common practice for companies to invest in bonds or shares or other assets (asset class). Whenever a company has too much cash component, it invests it somewhere.
At a time when the whole world has been suffering from economic slowdown for the past several years, which has reached its peak in 2020, companies are avoiding investment. Due to this they have increased the amount of cash, which if they do not invest, their income will decrease and due to this their income will fall per share and then the market price of the stock.
But the problem is that interest rates are running at their lowest level all over the world. In the US and Japan, it is close to zero. In other countries also, it is at a low level of many years, and there is no possibility of improvement in this for 3-4 years to come. In such a situation, companies are finding new destinations for investment. Tesla has invested 8% of its total cash reserves in bitcoin. But many other large multinationals are also in line.
Twitter’s finance director Ned Segal has also indicated that his company is considering investing in bitcoin, while a Royal Bank of Canada research note outlined how doing so could be beneficial to Apple.
This story is not new. The modern economy has seen the insanity of investors many times for any one asset class, and history has shown that every such insanity has ended with destruction, whether it is the 2000 dot-com boom in the stock market, the 2008 sub- Prime crisis or real estate market in India. If anyone has any doubt in the current discussion on bitcoin, one should look at the history of bitcoin price.
Bitcoin was launched in 2009. In April 2011, the price of bitcoin was $ 1. Three months later in June 2011 the price of one bitcoin reached $ 32, ie a jump of 3100% in 3 months. In November 2011 it was once again at $ 2. In the same year of 2013, bitcoin saw two boom-burst cycles. Where the year started at $ 13.40, but by April, the value had increased to $ 220. Then a month later, by mid-April it was at $ 70.
At the beginning of October this year it was at $ 123 and by December its price had reached $ 1150. In just three days, it slipped from a high of $ 1156 to $ 760 and by the beginning of 2015 it was once again at $ 315. The story goes on like this until 2020, by 2021, when in March 2020 one bitcoin was getting $ 4000 in exchange and today it has reached $ 48000.
Like the classical boom story of any asset class, Bitcoin experts are now predicting to reach 1 lakh and $ 2 lakh by the end of 2021. But there is a firm rule in the world of investment – the one who climbs falls. And this is the second aspect of the story, which is discussed at the beginning of the article. As long as individuals are riding on the waves of boom and burst, then waste is limited to families only. But when the ships of institutions, companies and banks start boarding it, then it is a disaster.
If companies like Tesla, Twitter, and Apple come into Bitcoin, then the day the wave will come down from above, perhaps the economic tsunami of 2008 may cause big havoc. It is, therefore, necessary that governments and regulators around the world come together to formulate a global policy on bitcoin and other cryptocurrencies as soon as possible and before the world gets out of hand, save the world from the grip of another severe economic crisis.