Why Elon Musk’s big bitcoin investment thinking is wrong for most corporations

Elon Musk is known for a brain that combines the capabilities of a rocket-science supercomputer and self-driving algorithm, an ability to see the future that has paid off in one of the world’s biggest billionaire fortunes, and market’s largest companies, by being ahead of others in taking risks on going to Mars, electric cars and, long before that, a first big idea, finding and paying for things on the internet. But that doesn’t mean that on bitcoin, which Musk bought for Tesla‘s balance sheet earlier this year and profited from in the first quarter, he is out ahead in a way that other executives should be following.

He’s been merely keeping pace with retail investors from the Robinhood trading crowd and companies like MicroStrategy and Square, which were invested in bitcoin on their balance sheets before Tesla. Now, in citing the climate risks of bitcoin this past week as a reason to suspend the ability of Tesla customers to use the cryptocurrency as a payment method, Musk was entering a debate over the climate implications of bitcoin that isn’t news to anyone who has followed the market for years.

To experts who advise corporations, and to a growing group of chief financial officers, Musk’s back-and-forth on bitcoin does speak to real issues: Should more corporations be adding bitcoin to the balance sheet? Should they be staying away from bitcoin due to concerns including the energy consumption required to mine it contradicts growing ESG commitments to climate change?

The answers: maybe “no” and “no.” Starting with climate.

Martin Whittaker, CEO of ESG market specialist, JUST Capital, which focuses on holding companies accountable on issues like carbon emissions, said climate criticisms of bitcoin are easy to make, but can be oversimplified. “I’ve seen the numbers on the carbon footprint equal to Sweden or New Zealand and the truth is it depends on how the power is generated. … If you mine it all from bituminous coal that’s going to give you one level of carbon intensity, but if it comes from clean power it is a totally different footprint. … Cryptocurrency can be a big opportunity for anyone who cares about clean energy,” Whittaker said on a CNBC Global CFO Council virtual event this past Thursday.

In Musk’s defense, his comments on the energy intensity of mining were also a call to action for the crypto industry to focus on creating efficient operations — maybe with more control over the market for himself. One recent tweet referred to the “joke” cryptocurrency dogecoin that Musk has promoted as having a future in which it “wins hands down.”

In any event, the climate comments had leaders in the crypto space, who have been involved for over a decade, scratching their heads.

“I don’t understand why he said that, because I would expect him to understand how mining works,” said Wences Casares, CEO of digital bank and bitcoin custodian Xapo, speaking at the same CNBC CFO event, and noting that the world already wastes tons of energy in no useful activity and bitcoin mining uses a roughly miniscule percentage of world energy, and much of its operations already are renewable. Roughly three-quarters of mining operations use some renewable energy and 39% are entirely renewable (when hydropower is included), according to Cambridge researchers, who say the topic continues to be “misrepresented.”

The climate dynamics of crypto are complicated, but it’s simply not what corporations should be focusing on. It is a distraction from the basic learning about bitcoin many big companies still need, according to several finance and crypto experts, if they want to avoid being left behind by a fundamental transformation in the way money moves around the globe.

Data from a recent CNBC survey shows that more company finance chiefs are taking bitcoin seriously. A survey of the CNBC Global CFO Council conducted in March found a big increase in chief financial officers who say bitcoin is for real — the percentage doubled to over 50% since the last time CNBC asked CFOs this question in 2017. Among U.S.-based CFOs, specifically, the percentage saying bitcoin is for real doubled as well, from 33% to 65%. But most CFOs around the world, over 80%, also believe bitcoin is in a bubble and should not be accepted as a source of payment or held on the balance sheet.

Casares says bitcoin believers benefitted from Musk putting the cryptocurrency on the balance sheet as it raised general awareness, but it is not clear to him why that is a good move for a Tesla shareholder, especially with Musk now saying it will no longer be allowed for transactions. “It feels speculative to me. He wasn’t buying gold before,” the bitcoin bank CEO said.

In fact, Casares says a CFO who holds the view that bitcoin should not be a balance sheet holding is the one taking the correct view.

“I don’t think there is a prescient need if you are CFO of an important global company to have bitcoin on the balance sheet right now, especially if you were not buying gold to hedge currency risk as we think now of bitcoin as an option on gold,” Casares told the CNBC Global CFO Council on the recent virtual event. “I think it would be wrong for me to say a CFO should hurry to do something here. I don’t have a good argument for that, but it would be a disservice if I said you can forget about this for now.”

His warning for the executive class: if you don’t take bitcoin and crypto seriously you will be making a mistake equivalent to telecom executives who ignored the internet in the 1990s and what it was going to do for information. “It is hard to understand here we have the bones for something to happen that would be more relevant to a CFO than anyone else in a company and you’ll do better if you learn it sooner rather than later,” he said. Casares expects volatility in bitcoin to remain elevated for years, and says the market may not mature for a decade to two decades, but added, “I cannot imagine a Fortune 500 company having a CFO who does not understand it well, and early.” 

Some chief financial officers are digging into bitcoin more than others. David Sackett, CFO at ULVAC Technologies, a Massachusetts-based semiconductor supply subsidiary of a $2 billion market Japanese firm, has been a bitcoin investor for years, and as he watched the volatility of the cryptocurrency — rising and crashing hard and rising again — he says as a finance executive what he sees is a scarce resource subject to supply and demand. “I think it will come down again, but go up in value even more,” he said.

While Sackett says it is too early to think in terms of customers of the firm, which include Intel, wanting to buy in bitcoin, he believes C-suites should embrace bitcoin as part of the balance sheet sooner rather than later. “It’s a hedge against the future right now,” he said. “I’d rather get in now when the price is relatively low than when it is super high.”

Sackett, who allocated 10% of an individual retirement account to bitcoin in 2017, has been taking that message to his board. “Let’s have some available so when it does take off, this company benefits,” he says of his pitch to the board. “They didn’t share my enthusiasm,” he added, with the Japanese parent conservative by nature and the general belief that adding crypto to the balance sheet would not be consistent with the company’s core focus of making money in the semiconductor market.

But Sackett is not going to stop trying, telling CNBC he will continue to make his case to the board in the future. “If more people were educated on it I think more people would be open to it,” he said. “The board knows my position and I will bring more evidence why I believe this, and why it is a good decision.”

Deloitte has a team that’s been actively engaging corporate treasury and financial departments on cryptocurrency, and while its experts think Sackett’s hedging view is aggressive — they don’t think CFOs should feel compelled to buy bitcoin based on the premise if they wait longer they will be forced to pay higher prices — they do agree it is time for executives to get educated on crypto.

“It’s hard for a company to make a decision if they are not informed, and we are still in the education phase,” said Amy Park, U.S. audit & assurance blockchain & digital assets partner at Deloitte. “It’s not just the CFO but the audit committee and board and treasury and finance, so much that needs to get around making this change or moving to it as a form of investment.”

“It’s hard to have a view if you’re not educated,” said Rob Massey, Deloitte’s global tax leader of blockchain and cryptocurrency. “If you are a big company that has large amounts of funds moving across borders, that’s probably a pain point for you and you should probably be thinking about this,” he said. “Don’t run towards it, but have a point of view based on information and experience. It is new and complicated and that is why the board should be asking, ‘are we doing enough to understand it?'” 

Even if bitcoin does not turn out to be a singular crypto winner of the future, central bank digital currencies are coming, with China moving ahead and the Federal Reserve currently studying the issue and expected to release a white paper with MIT covering its views. One way to prepare for the world of CBDCs is to engage with cryptos now. That doesn’t mean buying for the balance sheet, but “it’s a reason to engage, an effective way to test points of view and how get ready,” Massey said.

Alexander Bant, chief of research in Gartner’s finance practice, says he sees most CFOs now saying bitcoin is not a fad, but they still see a high degree of risk due to the volatility and regulatory concerns. Even since Microstrategy, Square and Musk bought bitcoin for Tesla’s balance sheet, more CFO clients have proactively come to Gartner asking for information they can use in discussions with their board, though not the majority of CFOs, and not in terms of making a pitch like Sackett’s to his C-suite.

“They are not in the selling it to the board camp but making sure the board is knowledgeable on bitcoin. CFOs never like to get caught off guard,” Bant said. “We think digital payments will be something CFOs need to be well versed in, in a standard sense, but it is still wait-and-see to understand if it is bitcoin or ether or other coins. … We haven’t seen something like this in hundreds of years. We’re talking about really using a different form of currency to do transactions across the globe and over the past 12 months we’ve seen more CFOs willing to entertain the conversation. … they’ve got to get boards and investors and all parties thinking the same.” 

Bant and Sackett share one view on bitcoin: owning it as an individual investor is an important part of coming to better understand it, even if that doesn’t also hold true for corporations as an investment rationale.

Bant like Sackett, first invested in 2017. “I think, like everyone else, I wanted to diversify my portfolio. I think individuals have a different risk tolerance and threshold as opposed to corporations,” he said. “It’s simply a small portion to diversify a long-term portfolio.”  

More CFOs are making that move as individuals. “Several CFOs have told me that they are investing in bitcoin personally,” said Jack McCullough, who runs the CFO Leadership Council. “But they are not comfortable putting their companies excess cash into it.”

With uncertainty in the stock market and business conditions, adding volatile cryptocurrencies to a company treasury is difficult. Nevertheless, CFOs see value in bitcoin and are putting their personal funds into it. “I don’t recall a time when they were taking more personal risk than they allow for their employer,” McCullough said.

Indeed, Casares said one of the best ways for CFOs to get experience with bitcoin is through individual investing. “After 12 years of working in this uninterrupted, it is more irresponsible than responsible for the individual to not have exposure,” he said. Casares has recommended an allocation 1% of a portfolio to bitcoin for individuals. “Most people can afford to lose 1%,” he said.

He pegged the chances of losing your investment at 10% to 15%, and a higher than 60% chance it is 100x gain. “It is so asymmetrical. Just like I don’t think it make sense for most corporate treasuries, it makes sense for most individuals,” he said.