There is a secret reason that I think is the perfect reason Tesla is investing in Bitcoin, and it could be a great catalyst in the future. I'll explain this in detail, but first let me recap the basic stuff that we already know.
Tesla has about 19 billion in cash. We know they took 1.5 billion of that and invested it in crypto bitcoin. Seven and a half percent of their money that went into Bitcoin. This will likely lead other Fortune 500 companies to invest in Bitcoin too.
These are the basic things that we know make perfect sense, but there are some things that are not exhaustive, I want to elaborate a little more about thise points.
Obviously, there is the potential that the higher the search trends, the more retail investors are looking for a particular stock or cryptocurrency. This is a super loose link, but I tend to agree with the argument here that it is entirely possible that this bigger and sustained rally in Bitcoin we had going from 10 to 44K, was largely driven by institutional investors.
Tthe conclusion they are drawing here suggests that the different search dynamics suggest that institutions could be the incremental power behind Bitcoin, and then they make the opposite conclusion for Ethereum, meaning that private investors may currently drive the Ethereum boom.
This is an interesting change in trend. What this suggests is, if Elon Musk steps in this Bitcoin bandwagon, it is entirely possible that these institutions could absolutely drive another rally in Bitcoin.
Another interesting point is about digital assets. Because they are considered Indefinite-Lived Intangible Assets. It means when you file your quarterly or annual reports, you need to do what is known as impairment.
Let's explain what that means, we keep this nice and simple because a lot of it is like it's complicated. An impairment cost must be included under expenses when the carrying value of a long-term asset, like bitcoin, exceeds its recoverable amount which would be the current market value.
In other words if Bitcoin sells off, and it goes down for example, from 1.5 billion to 1.2 billion, Tesla basically loses $300 million dollars. If Tesla loses money on Bitcoin, they have to expense that loss, even if they are holding it.
This will be reflected in quarterly net earnings in the net income sheet for Tesla. Their last quarterly income was $369 million, in other words, if Bitcoin was down 20% in the same quarter, Tesla must recognize it as an expense.
That's awesome. If you show less income, you pay less tax. That is the fascinating thing about Bitcoin. If you have a loss in Bitcoin, you write it off, but if you have a profit as it goes from $1.2 billion to $1.5 billion, you are doing something called a Reversal of Impairment. You will take the 300 million that you wrote off and you will record that 300 million back as income. So you can literally foresee a time when Bitcoin sells off 20%, you could have Tesla have $400 million in revenue, but because they have 20% bitcoin losses, they can only show 100 million revenue.
Tesla will have a big sell-off because folks on Wall Street may not understand what is going on and people panic and freak out for not understanding bitcoin adjustment. It goes on and suddenly you can have a really cool opportunity to buy Tesla at a cheaper price if Bitcoin sells off right.
If then in the future, let's say, the Bitcoin goes back to what they paid for it in the second quarter, then we would say that you would have $400 million in sales again and realize that $300 million as an income.
Bitcoin is indeed risky, but up until now, every time we have had problems with the blockchain, we have been surprised by how resilient it is.
