Saturday, September 23, 2023

Giant Investment Destabilizes Stock Market


Bitcoin’s price shifted dramatically after Tesla announced a $1.5 billion investment in bitcoin. Also, according to its announcement, payments for its electric vehicles will soon make in bitcoin. With this news, the price jumps from $39,400 to nearly $48,000 in less than a day.

The price has risen by around 50% in the first six weeks of 2021. Tesla’s investment, driven by Elon Musk, is clearly profitable. It is estimated to value at over $2 billion USD, depending on the purchase date. It means a profit of almost $500 million. In other words, Musk’s annual net profit in 2020 was over $700 million.

Bitcoin’s Value

Tesla’s move to Bitcoin comes amid a wave of institutional money pouring into major cryptocurrencies in recent months. On top of that, many other companies have invested in their treasury reserves. The world’s sixth most valuable firm said it might enable people to buy and hold digital assets. With that, some other major companies tempt to do likewise. Twitter finance director Ned Segal has already publicized such a move since Tesla’s announcement. With all of that, a note from the Royal Bank of Canada argued that this announcement will benefit Apple.

Only cryptocurrency investors have reason to be excited about the prospect of bluechip companies adopting bitcoin. However, if this invasion comes into effect, triggering such a gold rush will also have some negative consequences. 

Excessive Volatility

Tesla stated in a letter that more flexible diversification will benefit everyone and allow users to maximize returns on their currency. They are prominent to use money markets to invest spare cash, taking tiny yields. It was always going to be difficult in this low-interest-rate climate.

With all of this, normal money management isn’t it. Bitcoin is a volatile asset that shouldn’t compare to a listed company’s cash reserves worth around a trillion dollars. In March 2020, the price fell below $4,000, a new low. After that, 2021’s price dropped over 30% before the recent spike.

Almost 8% of Tesla’s reserves are in bitcoin. If Apple, Microsoft, Facebook, Twitter, and Google follow Tesla’s lead, another $7 billion will invest. This is less than 1% of the current bitcoin market value. As a result, the indicators that worry firms and serious investors will only lead to a bull run that stabilizes the market. Analysts predict a price of $100,000 or possibly $200,000 by the end of 2021.

This growth will multiply the value of Bitcoin on the corporate balance sheet compared to when it was invested. With a total of 8%, Tesla’s allocation may affect the value of its reserves by up to 12%. That proportion could rise considerably faster if he received bitcoins for electric cars instead of converting them to dollars.

The issue is the possible impact on stock prices. Tesla’s stock price rose 2% on the news of the bitcoin investment, despite a 5 percent decline in the past. Microstrategy, a Canadian IT firm, is an example of a During the peak of bitcoin investment, the company’s stock price increased tenfold. It has fallen nearly a quarter since Tesla’s statement.

The result might be choppy stock markets, leaving them vulnerable to a crash when the bitcoin bull market finishes. It’s easy to imagine this could trigger a broader sell wave as investors try to recoup their losing positions. This can be very risky for users’ financial stability.

Regulator’s Approach

Regulators throughout the world worry about the spread of digital asset price volatility to traditional capital markets. A permit may not grant, preventing them from swiftly becoming effective backdoor trustees for corporations with large volatile asset balance sheets.

In recent weeks, ECB President Christine Lagarde and US Treasury Secretary Janet Yellen have expressed interest in regulating bitcoin.

The US regulator, the SEC, is the most important, yet it is not easy to guess what will be the response of the new head, Gary Gensler, who is a crypto expert himself. It circulates that the approach will more likely be wait-and-see to ban those listed companies who have assets like bitcoin.

The price of bitcoin expects to push through $100,000. A regulatory restriction on the reserve percentage of the listed companies can still hold digital assets. This is almost similar to the existing US rule that listed companies are unable to purchase more than 25% of the normal everyday volume of their own stock. If this rule happens, numerous companies will have to sell bitcoin if a price increase results in holdings breaking their maximum level. This selling pressure is never experienced in the crypto market.

After Tesla’s announcement, bitcoin sees as a good buy asset. The crypto community is the first in line to be waiting to see whether other major companies will follow suit. They are also waiting to see if Tesla will stay invested when its next quarterly announcement takes place. Given this popularity, a reckoning will be soon on its way over the prospect of the heady extreme changes of the crypto market being mainstream.

Vincent Sanchez
Vincent Sanchez
Vincent Sanchez currently writes articles for Cryptoconstellation. He completed his Msc in finance and had a successful career as an accountant. Vincent enjoys travelling and working out.

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