Incurring non-substantial loss in every vehicle sale, Tesla is making money by selling regulatory credits and crypto investments.
Highlights
- Tesla reported $721 million in earnings as 2020 turned out to be its first profitable year.
- The EV giant made almost all of its profits by selling regulatory credits and crypto investments while incurring non-substantial losses on its car sales.
- Being a market leader in the EV space, Tesla’s $1.5 billion Bitcoin investment makes a substantial dent on the Company’s clean energy image.
- Bitcoin mining’s massive power consumption and carbon footprint calls for countries to push toward decarbonization and shutting off the grid supply to the mines.
The American electric vehicle and clean energy company, Tesla offered a complete solution – sustainable generation, storage and usage – all are capable of being powered by the sun. Tesla has proved to the world that a business rooted in sustainability can also be successful. Tesla has brought a revolution in the world of the modern auto industry. Its success story is no less than a fairy tale.
Tesla reported a record quarter of profits for 2020 under GAAP, hallmarking the company’s first annual profitability but the profits did not come because of core sales to its customers. The $1.6 billion revenue the company received by selling regulatory credits last year surpassed Tesla’s net income of $721 million – meaning Tesla would have otherwise posted a net loss in 2020. These guys are actually not making any profit by selling cars. They are incurring non-substantial loss in every vehicle they sell. They are making money by selling regulatory credits and crypto investments.
Watch: Will Tesla’s $1.5 billion gamble on Bitcoin backfire?
A regulatory bonanza
Certain states in USA grant regulatory credits to automakers to encourage electric vehicle production and reduce emissions. Automakers must acquire a minimum number of these credits to comply with regulatory requirements. These credits can be bought and sold, so any automaker that doesn’t sell enough electric vehicles can buy credits from other automakers that do. Since Tesla only produces electric cars, it is able to sell reams of credits to other automakers who are unable to produce enough electric cars.
At the beginning of 2021, Tesla bought $ 1.5 billion of Bitcoin, the world’s most valuable cryptocurrency, only to generate $101 million in income from selling around 10% of their Bitcoin holdings a few months later before their Q1 2021 financial results. It was a shrewd move, considering Elon Musk’s high-profile backing of crypto as well as their announcement after their big Bitcoin purchase that they would let people buy their cars with the cryptocurrency.
According to investors and analysts, Tesla’s huge investment in Bitcoin may be good for Elon Musk but it’s definitely a risk for the company that made him the world’s richest man. As a conventional holder of the consumer electric vehicle industry and the extensive climate tech movement rallying around it, Tesla’s gamble to go all-in on crypto could damage its climate reality and its reputation with customers even as other automakers pour into the EV market.
A recent study by Alex de Vries, a Dutch economist has shown that Bitcoins leave behind a carbon footprint of 38.10 Mt a year.
Relation between creating Bitcoins and electricity required
Bitcoins are produced by mining coins, for which advanced and sophisticated computers are used for long hours to do complex calculations. The more coins there are in the market the longer it takes to mine a new one and in t/he process, more electricity is consumed. As mining provides a solid source of revenue, people are willing to run power-hungry machines for hours to get one piece. In 2017, the Bitcoin network consumed 30 terawatt-hours of electricity in a year. Currently, the network is estimated to consume more than twice as much energy: between 78 and 101 terawatt-hours. Each bitcoin transaction roughly requires an average of 300kg of carbon dioxide, which is equivalent to the carbon footprint produced by 750,000 credit cards swiped. The major problem with mining Bitcoin is not its massive energy-consumption but for the fact that most of the mining conveniences are located in regions that bank extensively on coal-based power.
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Knowing Bitcoin’s current environmental footprint, Tesla’s alleged interest in moving the world to cleaner sources of energy and commerce is defeated. Until the energy grid decarbonizes in places like Russia and China, mining bitcoin remains a pretty dirty business from an energy perspective, according to some energy investors who don’t want to reveal their identity because they are not authorized to speak about Musk’s plan.
The Core Issue at Tesla
Ultimately, Tesla’s Bitcoin plans and regulatory credit sales are a theory. The core issue is that Tesla is not actually generating a profit from its business of manufacturing cars and so it has to rely on other forms of revenue. This suggests they need to invest more in their manufacturing capacity; get more cars in the showrooms at cheaper prices; so that they can start to make profits from their core business.
Tesla has already inspired thousands of consumers around the globe to join the energy revolution. If Tesla’s constant success helps drive more investment in renewables, then Bitcoin’s potential environmental impact becomes less of an issue.
