Wednesday, February 10, 2021
Volume 2, Issue 11


Shortly after bitcoin hit a record high in late 2017, a local coffee shop announced that they would accept the digital currency in exchange for food and beverages. Was this a sign of the beginning of the end of the U.S. dollar?

Hardly.

The posted prices in the cafe remained stubbornly denominated in dollars. The owner simply made it seamless for someone who owns bitcoin to convert the digital currency to dollars at the spot price and pay for a coffee. It was a gimmick, but who could blame the cafe owner? He wanted to attract a certain type of customer, but he could not post a menu with prices in bitcoin because all of his expenses were payable in dollars and bitcoin was, and remains, a tremendously volatile asset.

News of Tesla’s $1.5 billion investment in bitcoin and the company’s intention to accept the digital currency for its cars is obviously more significant than a local cafe accepting the currency, but how substantive the impact will be remains to be seen. Here is what the company had to say in the 10-K report it filed on February 8:

In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, we may invest a portion of such cash in certain specified alternative reserve assets. Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.1

Tesla really made two distinct decisions that have been somewhat conflated in media reports. Investing $1.5 billion in bitcoin is an investment decision presumably driven by management’s belief that it will appreciate over time. Announcing that the company will accept bitcoin as a form of payment is a separate policy decision.

Following Tesla’s announcement, bitcoin rallied to a new record high and trades around $47,000 as I type these words around mid-day on February 9. Conveniently, this is very close to the advertised price of a Model 3 with the long range option which starts at $46,990. 

If Tesla decides to accept bitcoin today, will they advertise the price of the long range Model 3 as one bitcoin? Or will the price still be quoted in dollars as $46,990? I suspect that the price will continue to be posted in dollars for U.S. based customers. By saying that they will accept bitcoin, what Tesla probably means is that they will, behind the scenes, facilitate the conversion of one bitcoin from a customer’s digital wallet, and apply the converted amount in dollars against the purchase.

Tesla’s functional and reporting currency remains United States dollars. For its U.S. operations, the company’s expenses are denominated in dollars. International subsidiaries operate with a functional currency based on the primary currency in which they operate.2

Tesla states that they may or may not liquidate the bitcoin received from customers, but if they do not liquidate the bitcoin and instead opt to add it to the $1.5 billion of bitcoin they are holding for investment purposes, what they are effectively doing is adding to their investment, just as if they accepted dollars and then purchased bitcoin on the open market, and the bitcoin will be considered intangible assets for accounting purposes:

… Digital assets are currently considered indefinite-lived intangible assets under applicable accounting rules, meaning that any decrease in their fair values below our carrying values for such assets at any time subsequent to their acquisition will require us to recognize impairment charges, whereas we may make no upward revisions for any market price increases until a sale, which may adversely affect our operating results in any period in which such impairment occurs. Moreover, there is no guarantee that future changes in GAAP will not require us to change the way we account for digital assets held by us.3

Tesla’s decision to invest $1.5 billion in bitcoin is much more meaningful that accepting bitcoin as a form of payment because they are taking a real risk with the capital.4 Only time will tell if Tesla will price vehicles in bitcoin terms or if they merely intend to facilitate the exchange of bitcoin to purchase vehicles priced in dollars. 

A bitcoin based economy would be one in which Tesla could pay for supplies and labor in bitcoin, sell automobiles in bitcoin, and pay taxes in bitcoin — in other words, have bitcoin rather than dollars as the corporation’s functional currency. We seem to be a long way from digital assets fully replacing government issued fiat currency if we take that broader perspective. 

Skeptical as we may be, it is not wise to reflexively dismiss bitcoin completely — after all, government issued fiat currencies are also not backed by tangible assets but have value because society at large has agreed that they have value. The more high profile companies and individuals who bestow bitcoin with a stamp of approval, the higher the chances that it will eventually gain widespread acceptance as a true store of value and medium of exchange. But we aren’t anywhere near that point yet.5


Cultivating Habits in Good Soil

I have posted many book reviews on The Rational Walk over the years but I do not really believe in summarizing books. There’s a big difference between a book review and a book summary. As Nassim Nicholas Taleb has written, “If a book can be summarized, it’s not a book but a magazine article; don’t read it and don’t read its summary.”

I briefly mentioned James Clear’s book, Atomic Habitsin last week’s newsletter and had a chance to think about it in more depth over the weekend. The result is a new article on The Rational Walk that I posted earlier this week. In Cultivating Habits in Good SoilI attempt to apply some of Clear’s concepts to the topic of habit formation in general, but I do not attempt to summarize his book. Clear’s work deserves to be read in its entirety.

Read Cultivating Habits in Good Soil on The Rational Walk


Earned Income Tax Credit

A $15 minimum wage has been a goal for progressives for several years and is now under active discussion as part of President Biden’s proposed stimulus bill. However, a minimum wage boost is not likely to be permitted under a Senate procedure known as reconciliation. If the minimum wage increase cannot be included in the reconciliation process, it will require a sixty vote supermajority in the Senate to pass which seems unlikely.

The recent debate reminded me of a Wall Street Journal op-ed written by Warren Buffett in 2015 promoting the earned income tax credit (EITC) as an alternative to a $15 minimum wage. In addition to creating fewer economic distortions, such as job losses, the EITC has the added benefit of having significant direct tax implications which are normally allowed within the reconciliation process. President Biden’s proposal does include an increase in the EITC but it is restricted to 2021 only and is not positioned as an alternative to a higher minimum wage. 

Here is an excerpt from Warren Buffett’s op-ed:

I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.

The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers. Payments to eligible workers diminish as their earnings increase. But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check.

In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.

Read the full op-ed: Better Than Raising the Minimum Wage


Pebbles in a Stream

I am very pleased to announce the publication of my mother’s new book, Pebbles in a Stream, which is now available on Kindle. It is a collection of 22 original short stories.

The paperback edition will be out in March.


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Tesla’s Bitcoin Announcement
  1. Tesla 2020 10-K report, page 22. []
  2. Tesla 2020 10-K report, page 72. []
  3. Tesla 2020 10-K report, page 22. []
  4. Wall Street Journal columnist Charley Grant compared the size of the bitcoin investment to Tesla’s R&D spending, noting that the two figures are comparable. []
  5. I recommend reading Why Bitcoin Hasn’t Gained Traction as a Form of Payment published by the Wall Street Journal on February 9. The author does a good job explaining some of the obstacles of using bitcoin in day-to-day transactions. []
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