Take a moment before exchanging appreciating assets for depreciating assets
Tesla now sells vehicles for Bitcoin, marking yet another milestone in Bitcoin’s history. However, this deal warrants special consideration.
Tesla is among a growing list of companies that have recognized Bitcoin’s value proposition, reflected not only in their proposal to sell vehicles for Bitcoin, but in their purchase of $1.5B of Bitcoin and their assertion that any earnings in Bitcoin will not be converted to fiat.
Tesla wants to hodl Bitcoin.
Exchanging bitcoins for Teslas is a novel, but fundamentally different transaction than legacy purchasing arrangements.
Dollars for Teslas is in essence exchanging one depreciating asset for another. The moment you drive your Tesla off the lot it begins a steep, but relatively predictable depreciation curve, losing about half of its value over five years.
Similarly, due to inflation, dollars and fiat currencies also lose their “resale” value over time. Whether the Consumer Price Index’s (CPI) inflation rate of around 2% is to be followed, or if the 25% of monetary inflation in the past year suggests inflation is or will be much higher, the reality is that holding excess cash is a guaranteed way to lose purchasing power.
The $35,000 sticker price for a Tesla Model 3 might not look too unreasonable if both the vehicle and the cash are on similarly downward trajectories of losing value.
Bitcoin for Teslas, on the other hand, is different.
Consider buying a car in exchange for private equity in a tech startup, one that has 60% market dominance in an emerging sector that has seen 200% year over year growth. That would be a bad deal. Such comparisons to early-Internet tech stocks have been made before, but fail to fully capture the scope of Bitcoin. Owning Bitcoin is akin to owning a piece of the Internet itself in the early 90’s, where each Bitcoin represents one-21-millionth of all possible URL addresses. Amazon can issue more shares, Bitcoin can’t.
Exchanging an appreciating asset (that has significant upside) for a depreciating asset (that has inevitable downside) is a one-sided deal.
Even though Bitcoin has risen about 200% per year in dollar terms over its lifetime, there is no certainty that it will continue this steep, upward trend. However, in a world of global monetary debasement, increasingly digitized payments, and growing institutional adoption, there is a strong case to be made that the demand for Bitcoin will continue to rise for the time being.
Board Members, The Clock Is Ticking To Discuss Bitcoin
It can take 3–12 months for companies to add Bitcoin as a reserve. Nimble boards have the advantage.
Bitcoin’s history of volatility could mean that the roughly 0.6 bitcoins it costs today for a Tesla Model 3 could turn out to be a bargain or a swindle should Bitcoin crash or spike immediately after the purchase. However, trend lines suggest that Bitcoin is rising in the medium to long term, making Teslas ever cheaper in Bitcoin terms. In a few years 0.6 bitcoins could buy a fleet.
Holders of Bitcoin are therefore incentivized to delay spending, whether for cars or anything else, creating a problem for those who want or need to make purchases now. Traditionally, making big purchases meant borrowing against collateral or signing lease agreements based on one’s creditworthiness. However, banks might not recognize Bitcoin as valid collateral or KYC/AML regulations may prevent lenders from issuing loans regardless of credit scores.
Bitcoin financial security is not equivalent to fiat financial security in the eyes of a fiat system.
There is a market for alternatives to selling.
Just as the sophistication of the Bitcoin ecosystem has evolved to the point where you can buy cars, it has also evolved to the point where you can earn interest.
New companies such as BlockFi, Nexo and Celsius have emerged in the Bitcoin lending space with interest bearing accounts. Depositing bitcoins with these companies can earn around 3% to 8% per year, paid out in USD stablecoins or bitcoins. These rates are much higher than can be earned in fiat savings accounts, and represents an opportunity for Bitcoin holders.
The interest earned off Bitcoin deposits could be used to provide income streams to pay for goods and services without sacrificing the initial position.
Currently Tesla’s Bitcoin policy requires payments to be made from a single wallet in a single transaction, whereas in fiat currencies they accommodate cash, leases or loans. For Bitcoin customers, a financing option that doesn’t require liquidation may be more enticing.
Bitcoin for Teslas or Bitcoin interest for Teslas?
By creating a Bitcoin financing plan, either independently or by partnering with a lending platform, Tesla would get paid monthly in Bitcoin from the accrued interest off the deposit, while the customer drives the car. At the end of the financing contract (either set as an agreed upon Bitcoin amount or dollar equivalent), the car would be owned outright by the customer and their initial Bitcoin deposit would be returned to them. Hodl and drive.
The rapid appreciation of Bitcoin in dollar terms could accelerate the speed at which the car is paid off, allowing customers to recover their deposits faster. This model could be extended to include Tesla’s other products, including supercharger miles, maintenance costs, insurance, solar roofs, or powerwalls. A deposit could cover all driving needs.
Of course, this arrangement would not be without risk.
The mantra, “Not your keys, not your coins” is foundational in the Bitcoin ecosystem.
Any bitcoins held by a 3rd party exposes them to risk, such as hacks, fraud, errors, or insolvencies (see Mt. Gox, Quadriga). Self-custodying Bitcoin is the best way to avoid 3rd party risk, but forgoes the potential upside of earning yield. There is no reward without risk.
For Bitcoin holders making major purchases such as cars, houses or kids’ education, liquidating their position has historically been the only option. The temporary allocation of Bitcoin to an interest-bearing account may soon emerge as a preferable alternative to liquidation for those needing to make purchases now.
Not your keys, not your coins… but loaning keys is better than losing keys.
Managing the risk of depositors’ bitcoins would ultimately be the crux of whether customers would accept a Bitcoin financing plan. Future financial disclosures will show whether Tesla’s current Bitcoin payment option is attractive to customers, or whether they will need to innovate in order to generate Bitcoin income.
The Bitcoin lending space is relatively new and untested, but represents an interesting alternative to divesting. Tesla would do well to recognize this potential value.
Bitcoin for Teslas is not a good deal.
Bitcoin interest for Teslas? I’ll consider it.