Bitcoin fans were thrilled to see car manufacturer Tesla add bitcoin as a payments option last week.
But a quick scan of the fine print suggests that bitcoiners should probably lower their expectations. It could be dangerous for their financial health to pay for a Tesla with bitcoin rather than dollars, especially if a refund is required.
J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog.
Bitcoiners have long dreamt of bitcoin payments going mainstream. The awkwardness of Tesla’s foray into bitcoin payments is symptomatic of how difficult it will be to achieve this goal.
All U.S. states have passed laws that protect car buyers unlucky enough to be stuck with vehicles that have manufacturing defects. These “lemon laws” vary by state, but in general any new car owner who has been sold a lemon has the right to a complete refund, or “buy back.” Tesla provides its customers with a long list of their lemon law rights here.
New car buyers have a certain time period to exercise their lemon law rights. Florida law, for instance, stipulates a car buyer has 24 months to make a lemon-law claim to the seller. The car seller is typically entitled to a few attempts to fix the car. But if it can’t, then the state’s lemon law is triggered and the owner can ask for all of his or her money back.
See also: Marc Hochstein – Elon Musk’s Bitcoin Marketing Coup
So when Tesla sells you a new $50,000 car, it isn’t just selling you a hunk of metal, plastic, rubber and a battery. It is also selling you a long-term relationship with Elon Musk. That is, you are purchasing his promise – a multi-year IOU in his name – to repay $50,000 cash when the conditions of your state’s lemon laws are triggered.
Unfortunately, the way that Tesla has specified this long-term relationship privileges people who pay with fiat over those who pay with bitcoin. To see why, look at the last page of Tesla’s three-page “Bitcoin Payment Terms & Conditions” below.
In short, if your $50,000 Tesla is a dud and your state’s lemon law entitles you to a refund or buyback, Tesla says it will pay you back in one of two ways. It will return the exact amount of bitcoins from the time of purchase. Or it will pay back the $50,000 in U.S. dollars. It reserves the right to choose which, bitcoin or dollars.
And that’s the danger. If the price of bitcoin has plunged by 50%, there’s a good chance Tesla will refund your lemon with $25,000 worth of bitcoins, not a $50,000 check. Congrats, you’re $25,000 poorer.
Buy a Tesla with regular U.S. dollars and you’re guaranteed a full $50,000 refund.
What if bitcoin’s price has doubled? If you qualify for a lemon law buyback, you’re probably not going to get $100,000 in bitcoin back from Tesla. Tesla reserves the right to pay the refund in fiat, so it’ll probably just send you a check for $50,000.
See also: Dan Kuhn – Want to Buy a Tesla With Bitcoin? It Ain’t Easy
Given reports of Tesla car unreliability, Tesla buyers may be particularly likely to require lemon law protection. Unfortunately, Tesla obliges its bitcoiner customers – but not its fiats – to give up a big chunk of their lemon law benefits.
That’s not a very fair policy for a company that wants to be seen as bitcoin-friendly. Bitcoin customers are being asked to bear all the risk of bitcoin price declines while all the benefits of price rises go to Tesla. It’s “heads I win, tails you lose.”
The difficulty of bitcoin payments
Tesla’s contortions around bitcoin purchases are emblematic of how tricky it is to refashion a speculative asset such as bitcoin for payments.
We usually think of a payment as a one-off…