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Tesla still isn't making money from its core business of selling cars and batteries. Its new foray into Bitcoin will bring not the stability investors crave, but still more risk and volatility. If Bitcoin takes another big dive from its record heights, the drop could trample Tesla's ascent towards profitability.

Even before the jaw-dropper in Tesla's new 10K filing, Elon Musk's affection for Bitcoin brought a fresh buzz to the flagship cryptocurrency, inspiring fans to believe more ardently than ever, and attracting a rush of new "investors." On January 29, Musk added "#Bitcoin" to his Twitter bio, an endorsement that sent its price 20% higher that day. Six weeks earlier, Musk had fielded a tweet from Michael Saylor, CEO of software vendor MicroStrategy, who's famously made amassing Bitcoin central to his strategy for enriching investors. "If you want to do your shareholders a favor, convert $TSLA's balance sheet to from USD to #BTC," Saylor exhorted. "In time, it would grow to become a $1 trillion favor."

In the moment, Musk didn't seem sold. "Are such large transactions even possible?" he queried Saylor. But in Tesla's annual report, released on February 8, Musk joined the Saylor bandwagon, stirring the Bitcoin craze and enhancing its newfound respectability in the process. Musk disclosed that Tesla just used its corporate cash to buy $1.5 billion in the digital coins. In the hour following the early-morning filing, Bitcoin surged as much as 23% to a record $48,000, before retreating to $46,500 in by 7:30 AM on February 9. What might seem like a zany bet didn't faze most Tesla investors, who lifted its shares around 1%, to within whisker of its all-time high.

The news, however, did not elicit the usual kudos from major Tesla investor and its leading raisonneur on Wall Street, Ron Baron of Baron Capital. In Shakespearean terms, Baron damned the Bitcoin gambit "with faint praise" in a statement to CNBC, declaring that "I'm sure a lot of thought went into the Bitcoin purchase by Tesla, and I look forward to learning the rationale."

In the 10K, Tesla provided an answer, stating that the purpose is "to further maximize and diversify our returns on cash." Indeed, Tesla, like most companies, is earning puny interest income on its war chest, and that war chest has recently grown huge. Last year, big equity and bond offerings swelled its cash horde from $6.5 to $19.4 billion, but Tesla booked just $30 million in interest. Tesla stated that it doesn't need the $1.5 billion to buy supplies or pay routine bills, and after purchasing the Bitcoin, has plenty of "liquidity" left over for running its businesses.

The problem: Loading up on the king of all volatile assets that hasn't yet, and may never find a practical use, renders Tesla's already hard-to-call financial future even foggier. The Bitcoin holdings won't be called investments on Tesla's balance sheet, like cash. Instead, under the regime governing digital assets, they're classified as "indefinite life intangible assets." That category includes items that unlike factories or labs don't host workers or make things. It encompasses patents, trademarks, customer lists and other items you can't touch or walk into that are supposed to provide such benefits as increasing revenues, lowering costs, or gaining in value. "Intangible assets are expected to produce good things in the future," says accounting expert Jack Ciesielski.

The goal of using Bitcoin to "maximize returns" on what was formerly cash means that Musk is betting the coins will keep waxing in value, creating a new source of profits beyond EVs and batteries. That wager's done great things recently for MicroStrategy's stock. The intelligence software provider recently announced that it now holds 70.5 million Bitcoin that it bought at an average price of $16,000 for a total of $1.125 billion. Today the coins are worth almost three times that number at $43,000. MicroStrategy's shares rode the Bitcoin boom, jumping six-fold since the end of Q3, and adding $6 billion in market cap.

As Ciesielski points out, the accounting rules for intangible assets require owners to take a hit to earnings if their value declines. But it bars them from booking gains if values increase. Hence, in each quarter, Tesla must book an "impairment" charge if Bitcoin tumbles. How much damage could a drop inflict? In 2020, Tesla earned just $1.115 billion before taxes. But that number included a windfall of $1.580 billion from selling carbon tax credits, a benefit Musk acknowledges will be short-lived. Its basic car business posted a loss of $426 million.

Tesla's fortunes did improve in the second half of last year, when it earned $914 million after the carbon credits. Let's assume that it makes the same amount through Q2 of this year, excluding its Bitcoin holding. We don't know the average price Tesla paid for its Bitcoin. But according to the 10K, it made the purchases in January, so a fair estimate is probably around $35,000. Bitcoin's jump to $46,500 as of February 9 gives Tesla a 30%-plus profit so far, largely created by Musk's vote of confidence.

Now let's take the scenario where the cryptocurrency retreats from nearly $46,500 to its price of $10,500 in early October. That 70% decline from Tesla's estimated purchase price of $35,000 would pound Tesla with an impairment charge of $1.050 billion. Its narrow but promising profit of $914 million would dissolve into a $136 million loss. At $10,500, Bitcoin would be selling at its average price from June of 2019 to the fall of 2020, when for a brief period, it actually found stability. And a history of huge spikes and steep declines are part of the Bitcoin pattern. In 2017, it jumped from $2000 to $20,000, then nosedived to $3400 by January of 2019. That's one-third the price in our steep-fall case.

Once again, Tesla can book losses but not profits on Bitcoin's fluctuations, as long as it holds the cryptocurrency on its books. It can only show a profit by selling the coins at higher prices than it paid. "Even if he sells 10%, that could drive the price of Bitcoin far down, just as this purchase drove it way up," says Ciesielski. "The only way to get a higher return on his cash is to sell some. But he's like his own GameStop chatroom." Selling coins even at a profit the would send the opposite message from the ringing endorsements that have helped recharge Bitcoin. Elon Musk is a great visionary. Did his vision extend to wondering what happens if he starts taking Bitcoin profits? Or the damage to Tesla if a phenomenon that bearing all the earmarks of a classic bubble explodes?