Tesla "Tests Liquidity," Sells $272M Bitcoin

Key Takeaways

  • Tesla’s sale suggests that Bitcoin can act as a liquid solution to generate income from cash reserves.
  • Tesla’s CFO added: “Bitcoin is a good decision to store cash not used in daily operations”.
  • Their easy exit has shown other large companies that Bitcoin can be a valid investment – even for the biggest portfolios.

Tesla’s Q1 2021 earnings reports revealed the company sold part of its Bitcoin reserves in late March.

While the market panicked at the thought of one of Bitcoin’s biggest proponents selling, this may open the door to further institutional investment.

Tesla Puts Bitcoin’s Liquidity to the Test

When Tesla added BTC to its balance sheet earlier this year to replace its cash reserves, Bitcoin registered its greatest move up in price ever.

However, during its Q1 earnings report, the company revealed it had sold off $272 million of its holdings, prompting panic in the market.

The firm’s CEO, Elon Musk, was quick to respond to these concerns. When well-known investor Dave Portnoy questioned Tesla’s move and accused Musk of pumping and dumping the biggest cryptocurrency, he responded:

“I have not sold any of my Bitcoin. Tesla sold 10% of its holdings essentially to prove liquidity of Bitcoin as an alternative to holding cash on balance sheet.”

In this light, Tesla has shown that companies can safely enter and exit Bitcoin positions with their idle cash. If the asset had crashed upon Tesla selling some of its holdings, this would be a clear signal that markets aren’t strong enough to support institutional investment.

This is an important consideration for large companies looking to invest in Bitcoin because their cash positions can be substantial. If the market isn’t sufficiently liquid, they can suffer high slippage when buying or selling BTC.

Slippage happens when a single transaction moves prices so much that the buyer gets a significantly worst rate than expected. If there are enough active buyers and sellers with significant positions, no sale, even as big as $272 million, will significantly move the market.

Not only has Tesla tested the potential limitations of their bold Bitcoin strategy, but they also booked profits on a successful trade. Whether an automaker should double as a trading desk, however, has given rise to some criticism.

Disclaimer: The author held BTC at the time of writing.

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