Why did Tesla buy bitcoin?

The move by Tesla to invest in bitcoins was seen as further confirmation of the legitimacy of the nascent asset that didn’t exist until about 12 years ago.

However, bitcoin is seen as a volatile asset that is prone to sharp price volatility and Monday’s announcement by Tesla was described by some corporate finance professionals as an unnecessary addition of risk to the vehicle maker’s balance sheet in the form of currency or a commodity, depending on how you classify bitcoin.

While it’s not clear, at this point, why Musk & Co. have opted to expose the company to the possible risk of owning bitcoin, here are a few reasons why the revolutionary company may have aligned itself with the crypto crowd.

Diversification

Tesla made it clear in its statement filed with its regulator the Securities and Exchange Commission that it sees bitcoin as a chance to diversify its cash and cash-equivalent holdings.

Corporations usually hold excess cash and/or cash-equivalents, like Treasury bills or commercial paper on their books to provide operational liquidity and generate returns while limiting risks.

Tesla wrote, “we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity.” 

The move isn’t without risk, Tesla acknowledges as the price of bitcoin could slump.

“If we hold digital assets and their values decrease relative to our purchase prices, our financial condition may be harmed,” the company acknowledges.

But a single bitcoin, which has soared 62% so far this year, could easily be headed for a six-digit value if bullish momentum continues to build, which would make Musk look smart.

Publicity stunt?

“Thankfully, Elon Musk on Monday once again ensured no one would be bored, with the unexpected announcement that Tesla will buy bitcoin and accept them as payment for vehicles,” writes Craig Erlam, senior market analyst at Oanda, in a Tuesday research note.

The analyst referred to the move as a “publicity stunt,” a move that everbody is talking about, but there are a number of ways to think about it.

Brand management

Bitcoin is associated with a group of iconoclastic founders who were attempting to break the mold on payments and fiat money. That was the idea behind cryptos being written into code back in 2009 by a person or persons known as Satoshi Nakamoto.

Those rebellious notions…