Swissquote Bank: Bitcoin soars, Tesla doesn't

February 9, 2021

By Ipek Ozkardeskaya, Senior Analyst, Swissquote Bank.

Major US indices renewed record on Monday, as investors continued piling into the risk assets on stimulus hopes. But the Asian trading session sent a mixed picture. Equities in Australia, New Zealand and Japan retreated, those in Hong Kong and Shanghai gained, while US and European futures traded flat to negative hinting at a lackluster open in the absence of major events on today’s calendar.  

US crude extended gains past $58 per barrel on news of increased Chinese purchases due to low freight costs and prospects of improved global demand as vaccine would help economic activity spur starting from the second half of the year.

But the biggest news came from Tesla on Monday, as company invested $1.5 billion in Bitcoin and said it intends to accept payments in Bitcoin in exchange for its electric cars.

Bitcoin’s price surged to a new historical high, a touch below $48k, but Tesla investors didn’t react with the same enthusiasm. The fact that Tesla accepts Bitcoin as a medium of exchange is a futuristic step, and perfectly fits the vision of its founder Elon Musk. But there are two important issues that emerges from the usage of Bitcoin for transactions. First, Bitcoin is an extremely volatile asset and history shows that the volatility is not only one sided. If Bitcoin’s price was almost multiplied by five over the past year, it doesn’t mean that it won’t come down crushing. The high volatility in Bitcoin’s value will therefore inevitably inject a certain volatility in Tesla’s revenue, and decrease the predictability of the company’s performance. Second, buying a Tesla car in exchange of Bitcoin is basically betting that the Bitcoin’s price will either stabilize or fall. No one would bury his or her Bitcoins in a car predicting that its price would triple again in the next few years. Well, the contrary could happen as well, but it’s a casino bet. Unless the price of Bitcoin stabilizes, either Bitcoin’s price falls drastically and you end up having won a Tesla in lottery, or its price triples and you end up paying your Tesla far too expensive.

Back to traditional stories, the US 30-year yield topped at 2% and implied inflation computed on activity in Treasuries accelerated to the highest since 2014, pushing the 10-year breakeven rate to 2.2% on rising oil prices and prospects of $1.9 trillion fiscal stimulus package that Biden’s about to pass through Senate. The inflation expectations from big banks hint at a solid uptick expected in the second quarter, as well. Latest data shows that Bank of America and JP Morgan expect a rise to 3% and more in consumer prices in Q2, and slightly less for the second half of the year. The average expectation is 2.7% in Q2, and a touch above the 2% level for the rest of the year.

While the rising inflation will not be a direct threat to the Fed policy as long as the average inflation remains near 2%, it sure brings up the question of what to buy to hedge against inflation.

There are noises that the rise in Bitcoin’s price by the rising inflation expectations, but that’s probably not true. Even gold’s protection against inflation is not as straightforward, given that the central banks back only a part of their monetary mass by gold holdings. So, Bitcoin won’t protect its owners against inflation any better than Amazon shares, or a Tesla car.

Now, the fact that gold finds buyers below the $1800 per ounce due to rising inflation expectations is a more plausible explanation, even though the relationship between gold and inflation is no longer as solid as it used to be, but the fact that central banks still hold gold as a percentage of their balance sheet does play a role in the perception of gold as a hedge against at least a part of the inflation generated by the ultra-loose monetary policies. Gold is up for third straight session, but the rising treasury yields increases the opportunity cost of holding gold and could slow down the rally approaching the 200-day moving average, near the $1850 per oz.