Why did Elon Musk sell Tesla’s Bitcoin?

Back in February 2021, Elon Musk made headlines when he announced the Twitter (TWTR 1.30%) that his electric car company, Tesla (TSLA 6.17%)Would buy Bitcoin (BTC 8.67%) as an alternative to cash. At the time, many saw the purchase as one of the most important events in Bitcoin’s short history. The $1.5 billion purchase of Bitcoin sent a frenzy of buyers piling in, driving the price of Bitcoin up nearly 20% in less than 24 hours.

Tesla and Musk are now back in the spotlight for the same Bitcoin that was bought over a year ago. In a quarterly earnings call, Musk revealed that Tesla sold 75% of its Bitcoin holdings. He cited that the company faced a need for liquidity amid uncertainty in its Chinese operations due to extended COVID-19 shutdowns. With supply chain disruptions and labor shortages, the company needed cash to ensure that the disruption in production did not have as large an impact.

The announcement caused Bitcoin to fall slightly, but it quickly recovered those losses after Musk further clarified his comments. He mentioned that the sale “should not be taken as a judgment on Bitcoin” and that the company will look to increase its Bitcoin holdings in the future.

As one of the most prolific entrepreneurs and richest men in the world, any purchase or sale of Bitcoin draws significant public attention. Even more attention is created when a sale takes place. However, it seems like the decision to sell Bitcoin was potentially the right move for the company.

The real reasons behind the sale

Although Tesla announced the sale last week, the company actually sold about 31,500 Bitcoin at a price of about $30,000 sometime back in May. The sale allowed Tesla to secure much-needed cash and avoid the worst losses when Bitcoin fell below $19,000 in July. Had Tesla not sold when it did, the company would have lost about $11,000 per Bitcoin or roughly $346 million. Probably due to good timing and a bit of luck, the company only reported a loss of $106 million by selling for $30,000 instead of around $19,000.

Tesla is the second largest electric car company in the world, and recently lost its title as #1 in July. The shutdowns led to some of the largest factories in cities such as Shanghai being closed for over a month this spring. This type of production hit forced Tesla to find new funding. Without selling Bitcoin, its latest earnings report would likely have been one of its worst in a long time. During normal production, Tesla typically sells about 60,000 cars in China per month. Despite a record number of cars being sold in June, approximately 70,000 fewer cars were sold in the second quarter compared to the first quarter.

By selling its Bitcoin, Tesla was able to shore up its cash reserves and reduce the impact of shutdown-affected factories in China. Ultimately, it may have been the right move to ensure that any further impacts from the shutdowns were minimal and wouldn’t hurt Tesla’s bottom line for the second quarter. It seems the decision was an attempt to minimize the damage that would inevitably have appeared on Tesla’s earnings report. While production numbers took a hit, Tesla was able to offset this with an increased amount of cash on the balance sheet. While it’s not always ideal to sell an asset for short-term reasons, it seems to have worked in this case — especially considering that after the earnings announcement, Tesla’s stock was up around 10%.