Long Bitcoin And Short Tesla? Here's Why Elon Musk 'Essentially' Made That Case

Tesla Inc TSLA made some big headlines earlier this month when the company announced it invested $1.5 billion in Bitcoin. On Thursday, DataTrek Research co-founder Nicholas Colas said the Bitcoin price investment might not be good news for Tesla investors.

Colas examined Elon Musk’s decision to invest in Bitcoin from three angles.

First, he looked at the opportunity cost of devoting $1.5 billion of precious cash to Bitcoin rather than investing in Tesla’s costly global expansion.

“If TSLA’s valuation pre-[bitcoin] purchase was based on the promise of widespread EV adoption, then does it possibly deserve a lower valuation now because it’s just signaled that the reinvestment opportunities in this industry are potentially lower?” Colas said.

Related Link: 5 Things To Consider When Choosing A Cryptocurrency Exchange

Bitcoin Up, Tesla Down: Tesla shares are already down 9.2% in less than two weeks since the Bitcoin stake was announced despite the fact that the bitcoin investment has already turned a significant profit.

The second reason Colas said Tesla’s bitcoin investment is a head-scratcher is that conglomerates tend to be undervalued in the market. Underperforming businesses within a conglomerate drag down the average valuation of the conglomerate because cash flow from the successful businesses ends up being used to support the lagging ones.

Colas said Tesla buying Bitcoin adds no value to Tesla because investors could easily buy a two-security portfolio of Tesla and bitcoin before the investment.

Marketing Investment? However, despite the two reasons Tesla investors should potentially be concerned about the Bitcoin investment, Colas said Musk may simply be investing in his brand as a tech visionary rather than implying anything negative about Tesla’s auto business. In that sense, investors can think of Tesla’s Bitcoin investment as a marketing expense that has worked like a charm given all the attention Tesla has gotten surrounding the purchase.

In conclusion, Colas said he has “no problem” with Tesla’s $755 billion valuation, but the fact that Musk is investing Tesla’s cash into Bitcoin rather than Tesla is telling.

“Closing out with a crazy trade idea to consider: long [bitcoin], short TSLA. Because essentially that’s what Musk has just done,” Colas said.

Benzinga’s Take: So far, the long bitcoin/short Tesla pair trade has worked like a charm. Since Tesla’s bitcoin investment was announced, Tesla shares are down 9.1% while the Grayscale Bitcoin Trust GBTC is up 13.8%.