In this article I will be outlying my thought process on determining whether I should or shouldn’t sell my Bitcoin position to buy more Tesla stock.
Why did I buy Bitcoin?
I bought Bitcoin in November 2020, though I’d been using Bitcoin for many years prior, though this time it was to invest. I bought bitcoin because I was concerned about inflation and I saw Bitcoin as a worthwhile hedge against inflation.
Has this changed?
There has been an increase in inflation.
When I bought in Nov 2020, inflation (measured as CPI) was at 1.2%, and it is now (most up-to-date data only reports until EoM August 21) 5.3%. I believe that I initially overestimated the negative effects of inflation, believing it would be catastrophic and that there was real utility in having a hedge. I wasn’t technically wrong, as Bitcoin has increased in price since I bought it in Nov 2020 ($USD $16,068 to $53,767 (Oct 09, 2021) – an increase of 234.62% in under a year). You could even argue that this increase was a result of inflation, as many people were receiving stimulus cheques from the US Government, and it is likely that many of these people bought BTC with that money borne as a result of QE.
Should I be worried about this inflation?
I invest primarily in disruptive technological innovation, that is, growth stocks. These companies, Tesla, for example, I expect to grow exponentially for at least the next decade. If more money is pumped into the economy with quantitative easing (QE), and that results in inflation, that will result in future cashflows for Tesla being more heavily discounted, which results in decreased present value of cash flows, and thus, a lower valuation (in the short-term).
In 10 years time, when/if I decide to sell my Tesla stock, people will still be trading currency for a vehicle, and that currency will reflect the cost of production + Tesla’s profit margin, irrespective of inflation. By owning Tesla stock, that is a high-growth company, I am investing in a company with high demand, low competition, high strategic positioning, excellent product quality, excellent business model and manufacturing capabilities; as such, I expect this stock to be valued higher in the future.
Why does this matter?
This matters because it is my view that inflation will not meaningfully affect my investment in Tesla as in 10 years it is my belief that Tesla will produce significant revenues and profits, and this will occur with or without inflation.
So, is BTC or Tesla a better hedge against inflation?
Well, firstly let’s analyse what determines the price of both BTC and Tesla, respectively.
BTC and Tesla’s price is determined by supply and demand.
BTC produces nothing, though is finite in number, and therefore is scarce.
If people believe more people will use/buy BTC in the future, then the price will increase because demand increases. Conversely, if more people believe less people will use/buy BTC in the future, then the price will decrease.
Tesla produces energy solutions in the form of batteries, electric vehicles, and other renewable energy solutions. Additionally, Tesla produces technology in the form of its system for producing the machine that produces the machine (their manufacturing/designing of their factories that produce the products), and artificial intelligence (autonomous driving, and sometime in the future AI humanoid bots) products/technologies.
Tesla will increase in price if more people believe that Tesla will generate more cashflows in the future, than they do at the present time. Many people can believe Tesla will not produce more cashflows in the future, the price could go down significantly (even 90%), but as long as they continue to execute and generate increasing cashflows, at some point, even if the stock goes sideways (that is, it doesn’t meaningfully increase) for a long period of time (say 5 years, for example, as evidenced in their past), it will at some point increase in value to match the revenue/profits.
Tesla’s price is not determined only by market sentiment (belief) in that the stock will increase in value, but primarily by its execution, investment, revenue and profit. This will occur irrespective of inflation, but it may be affected by say a world war.
Tesla vs Bitcoin
Tesla is my highest conviction stock, and at worst I predict it will increase about 6x from current price (Oct 09, 2021), and at best 20-25x over the next 10 years. Do I believe that BTC can match that? And what is more risky? BTC does not produce anything, and thus the risk is far, far higher. Its price is predicated on market sentiment and belief, and is completely at the mercy of the belief of the market. Tesla is predicated on belief, in part, but the fundamentals, that is, revenue and profit, will always shine bright and force market sentiment and thus price.
BTC is already at a market capitalisation of ~$1.05T USD; Gold’s market cap is ~$11.17T USD. As BTC’s primary use case, in my view, is that of a hedge against inflation, I don’t believe that BTC will overtake Gold, or at least it won’t exceed gold, in terms of market capitalisation. Based on this belief, BTC could theoretically top out at 10x increase. I must stress that this is a belief, and it could be wrong; this belief is predicated on the primary use case of BTC being as a hedge against inflation, and could be invalidated if there were a significant uptick in BTC use borne as a result of more widely relevant use cases being created or becoming increasingly highlighted.
In conclusion, I believe it will produce greater returns if I sell my BTC position and invest that capital into Tesla. This decision is predicated upon trading a non-productive asset for a productive asset, and that this productive asset, in my view, has greater upside with less risk over 10 years. This is not to say that BTC is or isn’t a good investment, but for my situation it is a less intelligent allocation of capital when I could invest that into Tesla.