Why Tesla Was Right To Sell 75 Percent Of Its Bitcoin Holdings In Q2

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Bitcoin sold off after Tesla Inc (NASDAQ:TSLA) revealed in its latest earnings report that it had sold 75% of its bitcoin holdings. Bitcoin has shed more than $700 from its value since midnight. However, cryptocurrency as a whole retains its $1 trillion market capitalization, at least for now, as the bitcoin price is still over 15% higher than it was a week ago.

So why did Tesla sell its bitcoin, and was it the right move? Crypto enthusiasts may be disappointed, but it was all business on Elon Musk’s part.

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Q2 2022 hedge fund letters, conferences and more

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Tesla Posts Solid Results

Tesla released its second-quarter earnings results after closing bell on Wednesday. At $16.9 billion, the automaker's revenue matched the consensus. Tesla also reported adjusted earnings of $2.27 per share, coming in ahead of the consensus at $1.83 per share. The stock popped in after-hours trading and now is up by more than 5% in early-morning trades.

The second quarter marked the end of Tesla's quarterly streak of posting record revenue numbers. However, the EV maker's sales were still robust despite the shutdown at its factory in Shanghai. China's zero-COVID policy resulted in widespread shutdowns throughout the city, limiting production at Tesla's factory. However, the automaker still touted an operating margin that was among the highest industry at 14.6%.

Tesla was also free cash flow positive at $621 million and ended the quarter with its highest vehicle production month ever. The automaker had previously reported that it had produced 258,580 and delivered 254,695 vehicles during the second quarter. Tesla still expects to grow its total delivery numbers by 50% year over year for 2022.

Was It Wise For Tesla To Sell Most Of Its Bitcoin?

Crypto enthusiasts are undoubtedly upset that Tesla unloaded 75% of its bitcoin. However, from a business standpoint, it made sense for the automaker to do so because it was better for shareholders. Analyst Marcus Sotiriou of digital asset broker GlobalBlock said in an email on Thursday morning that bitcoin reached a key resistance level of about $23,250, but after Tesla announced its sale, the cryptocurrency dropped.

In his statement regarding the automaker's sale of $936 million worth of bitcoin, CEO Elon Musk said cryptocurrency isn't yet contributing to an environmentally sustainable future. More importantly, he added that they sold their bitcoin due to uncertainty related to the lockdowns in China. In other words, Tesla wanted to raise cash in case China closed its factors for an extended period.

Historically, Tesla has often gone back to the till to raise more capital, and it has frequently been criticized for doing so due to its history of burning cash. However, this time around, the automaker decided to sell most of its bitcoin to raise capital instead of diluting shareholders further through a stock sale.

Sotiriou agrees that it made sense for Tesla to sell its bitcoin to raise capital due to the macroeconomic backdrop and rising interest rates. He also said the move serves as "an example of good risk management from the world's richest man." Sotiriou added that without the bitcoin sale, Tesla's net change in cash would have been -$89 million.

"Funds and lenders who have faced liquidity issues have been heavily scrutinized for their poor risk management, and rightly so," he said. "Hence, I don’t think Tesla should be criticized for managing their risk in this uncertain macroeconomic environment. They may well buy back bitcoin or other digital assets when conditions improve."

What Does This Mean For The Bitcoin Price?

According to the crypto analyst, data from Glassnode shows retail investors are snapping up bitcoin at the fastest rate in history, so Tesla's sale isn't necessarily a bearish indicator for the cryptocurrency. Sotiriou noted that the 90-day change in bitcoin addresses with less than 1 coin — typically those owned by retail investors — is at record highs.

"The last time it was close to this high was in 2018 when bitcoin peaked at around $20,000," he explained. "The fact that a similar rate of accumulation is happening now after a 70% drop demonstrates conviction from retail holders in Bitcoin’s long-term value."

Looking forward, Edward Moya of OANDA expects bitcoin to be "in for a choppy period" until after next week's decision from the Federal Open Market Committee. The Federal Reserve is expected to raise interest rates again at that meeting.