The Cryptocurrency Bubble?
Tesla. Bitcoin. Dogecoin. Cryptocurrency.
These might be the internet's most searched words in the past month. Why wouldn't it be? The price of Bitcoin has shot up by > 1000% since March 2020. Dogecoin, a cryptocurrency which was created out of a meme - has risen by almost 1400% in the past month or so. Greed, has really overtaken the markets - with people wanting to make easy quick money.
In this episode, we spoke about the following key topics.
Tesla buys Bitcoin
One of the major announcements this week was Tesla coming out and saying that it was going to buy Bitcoin worth $1.5B. That's how much they spend on R&D in a year. Tesla would also start accepting payments in Bitcoin. Now, as exciting as this sounds - it opens up a series of problems.
(i). Bitcoin is extremely volatile
It wouldn't be surprising if 6 months from now, the price of Bitcoin went down by 50%. This could very well happen, if Governments around the world decide to impose stricter regulations on Cryptocurrencies. In that case, the 'investment' made by Tesla - would be worth a hell of a lot less!
This investment of $1.5B is approximately 8% of Tesla's total cash & cash equivalents - which is no small number. If tomorrow Tesla needs that money, and isn't able to encash those Bitcoins at a profit - it could be a very risky bet.
(ii). Bitcoin Payments
Accepting payments in Bitcoins will be equally tricky. Because the price of Bitcoin fluctuates so much, on any given day - the price of a Tesla could vary substantially. The Finance team at Tesla might have to account for the fluctuations in Bitcoin on a daily basis and it would be an accounting nightmare just to execute this in the long term. Plus, the disclosure of Bitcoins on a balance sheet itself would pose certain challenges.
Potential Insider Trading?
On Reddit, someone who claims to be an employee at Tesla alleged that the Company had started buying Bitcoin quite some time back when it was trading around $33,000. The user has not been verified to work at Tesla (yet) - but wouldn't that be convenient?
Elon recently changed his bio to '#Bitcoin' - which alone caused the price to spike by 4-5% in a matter of minutes. He has been backing this currency & although you can't say that he's directly influencing people to buy Bitcoin - it is quite obvious that his tweets has stirred up excitement in this space.
The question here is, does the SEC have any jurisdiction over this? And even if they do, can they legally do anything about it?
The Rise of the Doge
Dogecoin has been on a tear. It's actually more valuable than quite a lot of listed companies out there. The photo of a smirking dog on a coin - who would've thought anything would come out of that?
But tweets from Musk and several other celebrities have sent the Dogecoin flipping high into the stratosphere. Can it sustain this insane run? Only time will tell.
Where are the regulations?
Turns out, there's not much the SEC can do about the rise in these Cryptos. There's no specific law that governs Cryptocurrencies at the moment and conservatively - it might take sometime before anything substantial happens on the regulations front.
Back in India, the GoI is planning to bring a Cryptocurrency bill which would make it illegal to hold any private Cryptos. The draft bill is not yet out, so if you hold any Bitcoins - you still have time to square off your positions.
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