The recent news that Elon Musk’s Tesla has exchanged $1.5bn for bitcoin has provided further fuel to the cryptocurrency’s price.
As a financial matter, it is of little consequence what a large corporate chooses to do with a small part of its treasury operations. The disproportionate commotion since the announcement tells us that this is not really about balance sheet management.
Instead, it bears striking similarities to collaborations between fashion brands and pop icons, often indicated by an “X” such as “Beyonce x Balmain” or “McQueen x Hirst”. As Vogue magazine wrote about these collaborations, it can seem as if “they’re designed to trick us into thinking that a sneaker or a hoodie is more desirable by the mere fact that it has an “X” on its label”. In the case of “Tesla x bitcoin”, the punk credentials of each are impeccable; whether, in the long run, the clean transport utopia of Tesla sits well with the environmental harm from mining bitcoin remains to be seen.
But here’s the question: should you be worried about “missing out” on bitcoin? In short, no.
It’s basically a very high risk venture capital-style bet. And most of the time (unless you are a venture capital fund manager) you aren’t expected to make these kinds of bets with significant portions of your wealth.
In fact, rather than cause worry, Tesla’s action should provide some reassurance.
Why?
Because it demonstrates the process through which most investors will eventually have exposure to bitcoin anyway – if it takes off. And they don’t need to lift a finger.
Here’s what will happen:
Investors holding passive index-tracking investment funds automatically end up with exposure to new technologies and companies that end up growing very large.
In this case, if more large corporates follow Tesla’s lead and adopt bitcoin as part of their cash management strategy, owners of index funds will by default end up with exposure to bitcoin, too.
Sure, they won’t be rewarded with the venture-style returns possible through direct, early exposure – but that’s ok, because they are not taking the venture-style risks of failure, either.
Consider the case of technology stocks. Over the past 10 years in the S&P 500, the share of companies in “old” industries – Energy, Industrial, Materials and Utilities – has halved from 30% to 16%, while the share taken by “new” industries such as Technology and Communications has almost doubled from 22% to 38%.
In that decade, a handful of tech companies such as Apple, Amazon, Google and Microsoft have come to dominate the global economy. Whether you saw this coming or not doesn’t matter. Nobody held a gun to your head 10 years ago and said “Tech or Energy! Choose now!” If you had an allocation to a passive world equity index fund (and most diversified portfolios do), it gradually increased your exposure to this multi-decade trend, allowing you to benefit from it without having to make a venture-style bet.
Bitcoin – and its underlying technology, blockchain – should be considered in the same way.
There’s no rush, whatever your FOMOnkey is telling you.
If it matures into something valuable and useful in the world economy, you will have plenty of exposure to it in the end, without having to take any action. If it doesn’t, you will have saved yourself a lot of time and distraction by focussing on matters that really make a difference to your financial life, such as your job or your business.
Tesla’s decision, whatever one makes of it, shouldn’t be a reason to worry about “missing out” on bitcoin. Instead, sit back and let the market take care of it for you.
- FS