Tesla took a drastic step early this week announcing they were taking $1.5 billion of balance-sheet cash and investing in Bitcoin. In doing so, they became at least the third multi-billion-dollar public company to announce Bitcoin as a treasury asset that will be utilized in lieu of cash. Tesla also announced it will begin accepting Bitcoin as payment for its cars.

At recent prices, Tesla is the fifth largest company in the U.S., so this announcement deserves major attention.

But first, what is Bitcoin?

The simplest explanation is Bitcoin is digital money. A more articulate explanation is that Bitcoin is a decentralized network of value storage that allows users to transfer value to other network participants without any central administrator or authority. There are many digital currencies in existence today but Bitcoin is the largest by a wide margin.

In essence, Bitcoin works on the same concept as the board game Monopoly. If you land on Park Place and want to purchase it, you pay the bank and receive the asset with everything settling instantly.

Our current financial system does not work quite like this. For example, if you go to Starbucks and buy coffee with a credit card, that sale is not final when the barista hands you a coffee. Rather, your bank and Starbucks’ bank generally settle that transaction a couple days later, with each bank taking a small amount of credit risk during the process. To the contrary, Bitcoin safely settles roughly every hour without any credit risk because there are no intermediaries involved in the process.

Boiled down to its core, Bitcoin is an attempt to improve upon the existing global financial system. In the process, it has become an incredibly divisive asset.

Bitcoin’s superfans possess a passion that rivals that of a sports fan base. The Bitcoin naysayers believe the entire concept is patently absurd. Bitcoin optimists have mentioned price targets north of $500,000, but the pessimists refuse to believe it’s worth anything more than $0. The truth likely lies somewhere in between.

Whether Bitcoin becomes a universally accepted store of value remains unclear. The attraction from an investment standpoint is Bitcoin has a finite supply; only 21 million will ever exist. Contrast that with the U.S. money supply growing roughly 30 percent in 2020 on the back of government stimulus – many foreign governments undertook their own stimulus programs as well. In a world where governments are consistently printing money, in effect lessening the value of their currency, owning an asset with capped supply becomes attractive.

The theory is logical and hard to refute. But Bitcoin was only invented in 2008, leaving us with little empirical evidence to forecast how long-term returns may shape up. It should be acknowledged that Bitcoin has been one of the best returning assets of the past decade, outperforming the Nasdaq by about 60 percent annually since 2010.

Positive price appreciation drives positive sentiment and there are speculators holding Bitcoin who will sell it as quickly as they bought it when the price falls. Yet, over the course of Bitcoin’s short history, every crash has been followed by a subsequent rebound. Replicating those returns in the future seems unlikely but at the very least Bitcoin has proved it has staying power.

Corporations are now using Bitcoin as a treasury asset. Merchants are enabling it on their platforms as PayPal announced it is now allowing Bitcoin to be utilized for purchases at its 26 million merchants worldwide. Municipalities are beginning to explore its potential as well; the city of Miami, Florida is rumored to be purchasing Bitcoin with an official announcement expected soon. The list will likely get longer as time goes on.

Many proponents compare Bitcoin’s adoption to the way bamboo grows in the forest. Like any plant, bamboo requires nurturing. But after multiple years of sunlight and water, no bamboo is visible above ground. Around the fifth year of its growth cycle, bamboo will shoot up approximately 80 feet in about six weeks. While bamboo remains unseen, the plant is hard at work building an extensive underground root network capable of supporting its outward growth. As has been said, it happens slowly then suddenly.

Tesla’s announcement moves Bitcoin to a point in its adoption cycle where it is now growing above ground.

This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique circumstances.

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