What Impact Will Tesla’s Selling Of 75% Bitcoin Have On The Crypto Market?

[TL; DR]

Elon Musk and his electronic motor company, Tesla, are strong advocates of cryptocurrency investment.

In 2021, Tesla acquired $1.5 billion Bitcoin as part of its cryptocurrency investment.

In 2022, Tesla revealed that it had sold 75% of this investment, worth about $936 million.

While holding the Bitcoin asset, Tesla made over $100 million in profit as the price value increased to about $2.48 billion at the end of 2021.

In early 2022, it fell to about $2 billion with a loss of about $460 million.

Elon Musk said the sales of the Bitcoin and conversion to fiat became necessary due to the covid 19 lockdown in China and the need to maximize Tesla’s cash positions.

The impact of the sell-off was that the price Value of Bitcoin dropped from $24,000 to less than $23,000 24 hours after the announcement.

Experts assert that some investors look up to Elon Musk and would sell off a significant part of their digital assets in solidarity with him.


Elon Musk, the CEO of Tesla, is undoubtedly an advocate and enthusiast of cryptocurrency. Over the years, Elon Musk and his electric automobile company, Tesla, have actively associated with and promoted crypto tokens such as Bitcoin and Dogecoin.

It was unsurprising that Tesla acquired $1.5 million of Bitcoin in 2021. For that part of the year, Tesla sold their vehicles to customers willing to pay in Bitcoin.

It is, however, surprising that barely a year after, in 2022, Tesla is selling about $936 million worth of crypto. That is, 75% of its crypto holdings.

This article will identify the reason for the sell-off of Tesla's significant percentage of crypto holdings and the impact of the sell-off on the crypto market.


Tesla’s Investment In Cryptocurrency

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In 2021, while the crypto market was at its bullish phase, Tesla embraced Bitcoin and invested about $1.5 billion in the cryptocurrency. Elon Musk, Tesla's Chief Executive Officer (CEO), touted Bitcoin’s advantages over fiat currency and became a de facto influencer for crypto investments.

After the investment by Tesla, the price value of Bitcoin and other crypto tokens soared higher and reached an all-time high. After a relatively long period of bullish, the crypto market began to decline. The decline in the crypto market started in the early moments of 2022, and after several months of steady decline, the primary crypto tokens are experiencing crypto winter.

According to Tesla’s second-quarter financial summary, the electric motor manufacturer’s profitability became affected by “Bitcoin impairment.” Since Tesla recorded over $100 million in profits from its crypto investment in 2021 and locked the gain in the crypto market, the fall in the market signifies that the investment will be directly affected. To save face and prevent further loss, Tesla announced the move to sell 75% of its Bitcoin investment in 2022.

This decision was made long after Tesla’s shareholders disagreed with the decision to receive Bitcoin in exchange for the electric cars. In May 2021, Tesla suspended the sales of vehicles for Bitcoin, citing the environmental impact of Bitcoin mining.

It is essential to know that crypto mining extensively uses coal and other fossil fuels; this process is energy intensive and poses a high risk to the natural environment.


Impact Of Tesla's Sell-off Of 75% Bitcoin Holdings

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In the first quarter of 2021, the market value of Tesla’s Bitcoin holdings rose to about $2.48 billion, and at the end of the year 2021, it fell to about $2 billion, signifying a loss of about $460 million. Experts asserted that this considerable loss prompted the sale of about $936 million worth of Bitcoin investment.

Elon Musk said, “The reason we sold a bunch of our (Tesla’s) Bitcoin holdings was that we were uncertain when the Covid lockdowns in China would alleviate, so it was important for us to maximize our cash positions.” This statement signifies that the sale became necessary to increase the fiat holdings of Tesla instead of the crypto holdings.


What then is the impact of this massive sell-off on the crypto market?

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It would be recalled that on Wednesday before Tesla announced the sell-off, the price value of Bitcoin stood at $24,000. Barely 24 hours after, the deal had fallen below $23,000. While this is not a significant impact or fall, it is no less of an effect and a loss to investors.

For someone like Elon Musk, who has become a de facto influencer of the crypto market, making such a decision will influence the decision of other investors who look up to him. These other investors might start selling a significant percentage of their crypto investments to align with Elon Musk and his company. Even though Elon Musk said, “This (sell-off of 75% Bitcoin investment) should not be taken as some verdict on Bitcoin.

Similarly, while we cannot attribute the drastic decline of the crypto market to the sell-off by Tesla, it is essential to know that since that sell-off, primary crypto tokens have continued to decline in price value. The crypto market is in its “crypto winter” phase as at Mid 2022.


Conclusion

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The sell-off of 75% of Tesla’s Bitcoin investment became necessary after the company’s second-quarter profit fell by 32% compared with the first quarter net profit of $2.26billion in 2022. Tesla had to shut down its Shanghai factory, froze the ongoing hiring process, and began to lay off its workers in Mid 2022. For instance, about 229 Tesla’s driver assist technology staff members, Autopilot, were laid off.

Tesla, therefore, believed that the sell-off of 75% of Bitcoin holdings and conversion to about $936 million would help boost Tesla’s cash reserve, and such an amount could be pumped into the company’s operation to keep it back on track.



Author: Valentine A., Gate.io Researcher
This article represents only the researcher's views and does not constitute investment suggestions.
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