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Elon Musk’s bizarre Twitter war with Bitcoin is expected to hit Tesla Inc’s TSLA earnings by -0.04% this quarter.
Investors are widely blaming Mr. Musk for starting the most punitive tranche of digital currency this year after he announced on Twitter that Tesla would stop accepting bitcoin as payment for its electric cars. He added fuel to the fire earlier this month, tweeting breakup notes with “#bitcoin” and a broken-hearted emoji. Bitcoin is down 30% since the original May 12 tweet.
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On Sunday, Mr. Musk said that Tesla will resume bitcoin trading when miners increase the use of renewable energy sources. The price jumped more than 6% from the level of Friday 5 pm ET to trade at around $39,300 early Monday. He also said that Tesla only sold about 10% of its bitcoin holdings earlier this year to confirm that the cryptocurrency “can easily be liquidated without moving the market.”
Tesla had about $1.3 billion worth of bitcoin parked in its vault at the end of the first quarter and announced a bitcoin purchase in February “to diversify and increase returns to our money.”
Software developer MicroStrategy and a handful of other companies, including payment app provider Square Inc. with similar investments. Some have described bitcoin as a store of value, or a more modern version of gold.
But companies that hold bitcoin in their vaults face accounting risk: Because bitcoin and other digital assets are considered “intangible assets of indefinite life,” rather than currencies, any decline in its value less than what the company paid — even temporarily — could force the company on value write-down and incur impairment charges.
These assets should be tested for impairment at least annually, or if the price falls below the book value of the company. The volatile nature of bitcoin makes quarterly revaluations routine. Once the company incurs liability, this resets the fair value of the asset. On the contrary, if the price rises, the firm cannot record a gain; She can only do this when she sells the asset.
Tesla, which did not respond to a request for comment, is expected to post a profit of 96 cents per share in the second quarter, according to analysts polled by FactSet.
Jennifer Stevens, an accounting professor at Ohio State University, said Bitcoin’s volatility, combined with this accounting treatment, makes it difficult for corporate administrators to manage crypto holdings as cash, making them less useful as a reserve asset.
“Accountability is a bit at odds with the primary purpose,” she said.
Few other companies were eager to jump into bitcoin. A February survey from research firm Gartner found that only 5% of CFOs questioned plan to hold bitcoin as a corporate asset this year. Among the CFOs surveyed, 84% said they never planned to hold it.
Bitcoin’s value has plummeted since Elon Musk said last month that Tesla would stop accepting cryptocurrency as payment for its electric cars. Photo: Michel Tantossi/Reuters
Tesla initially disclosed a $1.5 billion investment in Bitcoin on February 8, but did not specify how many bitcoins it held or the average price it paid. However, the change to its investment policy was made in January, and the average bitcoin price was around $35,400 between January 1 and February 8, according to data from CoinDesk. This means that Tesla likely held about 37,000 bitcoins after shrinking its position a bit in the first quarter.
As of Friday afternoon, Bitcoin hovered above $37,000, dropping to $30,202 last month.
Dan Ives, an analyst at Wedbush Securities, said Tesla will likely incur impairment charges on its bitcoin holdings this quarter. He added that the company was likely buying during the month of January and that at least some of those holdings are now at a loss.
“If the price of bitcoin is below $30,000, or below $30,000.” [at the end of the second quarter]The damage must be significant.” He said it could be similar in size to Tesla’s $101 million first-quarter gain from the sale of some of its holdings.
“It went from a tailwind to a real headwind,” he said.
Tesla’s results in recent periods have been supported by one-time gains. In addition to the gains from selling bitcoin in the first quarter, the company posted a gain of $518 million from selling regulatory credits to other automakers to help them meet emissions requirements. That pushed the company into a black spot at the time — Tesla reported net income of $438 million, or 93 cents a share.
Tesla will not be the first company to charge a significant fee for its bitcoin holdings.
MicroStrategy, which sells business software and holds about 92,000 bitcoin worth more than $3 billion, already posted quarterly losses due to this accounting treatment, in the third quarter of last year and the first of this year.
Last week, it said it expects to charge at least $285 million on its bitcoin investment in the current period, which would push it into another quarterly loss.
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Currently, MicroStrategy is just accepting to practice accounting, CEO Michael Saylor said in an interview. He said he sees bitcoin as a better value than the US dollar, and has made buying and holding it a priority for the company as software sales.
He said, “This sounds risky for someone who doesn’t understand bitcoin, but it is by far the least risky way to grow the company.”
The company’s bitcoin strategy has made Mr. Saylor a hero in crypto circles, but it has also made MicroStrategy stocks as volatile as bitcoin. The shares were trading at $135 last August when the company announced its new bitcoin strategy. They jumped to a record high of $1,273 by September, but have since fallen back, closing at $516.44 on Friday.
It’s hard to say how Tesla’s stock price will be affected by its bitcoin strategy since it’s a much smaller part of the company’s holdings, but the stock has been down since the February announcement. It closed at $609.89 on Friday, down 29% from Feb. 8.
Bitcoin, Dogecoin, Ethereum: Cryptocurrency Markets
Write to Paul Vigna at [email protected]
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