Tesla and some new corporate game theory
How Tesla's move into Bitcoin might be interesting for corporations
I’ve written my thoughts on Bitcoin as an alternative investment, and how based on the current economic environment, it may be prudent to allocate accordingly. While I’m not necessarily anticipating it, it is possible to envision a world where the dollar does lose status as the world’s reserve currency due to myriad factors. Therefore, it may be wise to allocate a portion of my worth toward Bitcoin, an asset that seems to thrive on societal chaos.
But something happened last week that introduces new factors to that equation - Tesla bought Bitcoin. Adding $1.5 billion worth of Bitcoin onto a balance sheet that had just a little under $20 billion in cash at fiscal year-end 2020, Tesla is now making a statement about what they think the future of money might be while greatly contributing to wider Bitcoin adoption as an alternative asset. Now, there is a fascinating new element to the corporate game theory that executives grapple with. Think of it from the perspective of a company like GM: not only does Tesla have a good hold on the market for the future of vehicles, but now they are also shoring up reserves in an asset class to which you don’t have any exposure. Competitors might conclude that they should be acting similarly to achieve optimal outcomes.
If Tesla has shown the automaker industry anything, it’s that they need to get more creative if they want to dominate the future. Tesla was widely criticized in its early years; now, anyone who has driven an electric car will assure you that it’s a superior machine in almost every way. They are faster, cleaner, safer, more efficient, and have significantly more room to improve upon than combustion engine vehicles. The rest of the industry is only beginning to catch up, making it easy to look back at the past decade and conclude how obvious the transition to electric vehicles was. A decade from now, it might look similarly obvious for companies to have added Bitcoin to their balance sheet.
Tesla is an auto-manufacturer, sure, but it’s also so much more. They are investing in battery technology and advancing the infrastructure to support vehicular autonomy, and their mission is to accelerate the world toward renewable energy sources. What would that world look like? Tesla is betting that such a world would also have likely embraced digital gold on a massive scale.
Game theory in the corporate setting is the science of strategy. To survive and thrive, stakeholders push toward the decision that generates the highest utility at any point in time. Tesla is signaling that this is the optimal strategy to preserve its balance sheet, and so a competitor must undoubtedly look more closely into this. While it’s not the first company to do this, Tesla certainly has made the biggest splash. Now imagine, what if Apple were to do the same? Adding a piece of its enormous cash stockpile in Bitcoin? Even a tiny percentage of that would further shake up the equation, sending a shock wave through markets and also helping to stabilize the price of Bitcoin. If corporations are getting skin in the game, it seems a lot less likely that Bitcoin could tumble so substantially that it would wipe out the value of their investments. It’s still possible, of course, but intuition leads me to believe that Tesla has conducted at least some critical financial analysis, and they have determined that this move will not affect the balance sheet negatively enough to outweigh its potential benefits. Critics say that Bitcoin’s volatility is a red-flag, but in reality, the asset has had annual growth of around 196% since its inception. If you strip away the short-termism of its price fluctuations, it has been a steady and meaningful assent.
So where does that leave us? What Tesla is doing seems groundbreaking, but the move is only affecting a somewhat meager portion of its balance sheet. If companies with larger balance sheets were to act in lockstep, a divestment into bitcoin would also likely be only a marginal percentage of their cash and cash equivalents. But while this may seem like an insignificant allocation for large public entities, it would be an enormous show of faith in Bitcoin and decentralization in general, as well as signaling what they think about the future of money. Tesla is just getting ahead of the game.