Tesla, now strongly linked to bitcoin, drops in value as cryptocurrency plummets

Shares in Tesla Inc. were hit Tuesday by a broad sell-off of high-flying technology stocks and the fall of bitcoin, in which the electric car maker recently invested $1.5 billion US.

Tesla plunged 3.8 per cent to enter red territory for the year, pulled down amid the tech selloff and falling bitcoin, which was down 13.9 per cent.

The firm led by Elon Musk has had a stellar ride since 2020, which it began at about $85 per share, before reaching the $900 mark on Jan. 25.

Bitcoin plummeted as much as 17 per cent on Tuesday as investors grew nervous at sky-high valuations, triggering the liquidation of leveraged bets and sparking a sell-off across cryptocurrency markets.

The world's biggest cryptocurrency was facing its biggest daily drop in a month, falling to as low as $45,000.

The drop took its losses to over a fifth from a record high of $58,354 hit on Sunday and underscored the volatility of the emerging asset — though it is still up around 60 per cent this year.

"The kinds of rallies we've been seeing aren't sustainable and just invite pullbacks like this," said Craig Erlam, senior market analyst at OANDA. "It was an extremely overbought market."

Bitcoin's high volatility, critics say, is among reasons that it has so far failed to gain widespread traction as a means of payment — an expectation that has in part fuelled its rally.

Tesla investment could backfire, trader says

A Germany-based trader said he was "taking chips off the table" on Tesla as its $1.5 billion investment in the cryptocurrency could "backfire now."

Among the factors contributing to the rise of the stocks is surging retail and institutional demand for "environmental, social, and governance" (ESG) friendly investments.

"There is a lot of reasons — purely from a sustainability angle — to hold Tesla. It is part of that transformation towards a more sustainable business model," Valentijn van Nieuwenhuijzen, chief investment officer at asset manager NN IP told Reuters on Friday.

However, Musk's decision to invest in bitcoin could weigh on Tesla's ESG rating, he said.

The billionaire has been criticized for lauding bitcoin prior to Tesla's purchase of the cryptocurrency.

His role in encouraging a retail frenzy in the shares of U.S. video game chain GameStop and driving up the price of the meme-based digital currency dogecoin have also come under fire while being acclaimed by a large fan base.

Analysts at Barclays noted that there had been a drop of conversations about the electric car makers in Reddit's WallStreetBets forum, which could explain some of the loss of appetite for the stock.

"With only 2-3 total submissions on each of the past several days, we remain below the trend in attention that has come along with big returns jumps in the past," the analysts said in a note.

Other analysts have also cautioned against investing in the stock which remains one of the most expensive on the S&P 500 index at 163 times its 12-month forward earnings.

While investing in bets against the company's stock have backfired spectacularly in the past, short interest in Tesla shares still stood at 5.5 per cent, according to Refinitiv data.