Tesla’s purchases of $1.5bn (£1.08bn, €1.2bn) worth of bitcoin last week is a major concern and rings many alarm bells for investors, says Lothar Mentel, chief executive of Tatton Investment Management.
Bitcoin was driven to record highs on 9 February – trading above $48,000 – as investors piled in on the news of Tesla’s investment.
In addition to the announcement, the electric vehicles manufacturer will start accepting the cryptocurrency for its products.
In a filing with the SEC, Tesla said it had bought the bitcoin for “more flexibility to further diversify and maximise returns on our cash”.
Spotting risk too late
For Mentel, a car manufacturer investing in bitcoin, and changing its corporate structure to do so, is a major concern.
“By way of comparison, would Volkswagen become a cryptocurrency trading business in the same way?” he said. “Too often in the past investors only find out about concentration or liquidity risk when it’s too late.”
Looking at the implications of such a move for the fund management industry, Mentel noted that high levels of concentration within any fund, whether by sector or for an individual stock, “ring alarm bells”.
“If a fund is particularly exposed in one sector, Tatton IM would either exit completely or reduce the size of our investment,” he said. “Tesla is a business that previously had exposure linked to the automotive cycle and battery development. This use of capital is not directed at increasing future manufacturing earnings.”
For any sensible investor, Mentel said the key should be about visibility and timing.
“It may sound boring, perhaps, but investing your life savings is a long-term business,” he said. “Fundamental to Tatton IM’s investment process is to create repeatable, sustained returns.”
He added: “There are many potential uses for a cryptocurrency but the essential premise of Tesla is that it is an innovative EV car company. It has led the way we travel. This diversification into cryptocurrency looks speculative.”
Russian roulette
According to research conducted by findoutnow on behalf of AJ Bell, more than half (58%) of crypto investors in the UK don’t have an Isa, while fewer than half have a pension.
“Our research suggests that a generation of investors have leap-frogged traditional savings and investments and jumped straight into the deep end by buying cryptocurrencies,” said Laith Khalaf, financial analyst at AJ Bell.
“If you’re the world’s richest man, investing $1.5bn of the assets of your electric car company into bitcoin is one thing. But UK consumers seem to be playing Russian roulette with their money on the cryptocurrency markets.”
As a result, while not doubting Elon Musk’s record of achievements, Khalaf cautioned Tesla’s purchase of bitcoin isn’t a strategy private investors should follow without stopping to consider the downside.
“Indeed, in their latest regulatory filing, Tesla take care to outline many of the risks of buying cryptocurrencies,” he said. “Musk can afford to lose a few quid if things don’t go to plan, not everyone else is in the same boat.”
