Tesla continues to lose money on its Bitcoin holdings

The automaker run by Elon Musk made a bet on crypto in early 2021, joining MicroStrategy (MSTR) as one of the few companies to have Bitcoin in its corporate treasury. Tesla sold off most of its position in the second quarter of 2022, dumping more than 30,000 Bitcoins or about 75% of its holdings and avoiding major losses.

Nevertheless, the group still holds Bitcoin and – under accounting standards – will continue to write down the value of its assets as long as prices continue to fall below the purchase price. Tesla initially bought Bitcoin for around $30,000 apiece, taking the bull market to the crypto’s all-time record near $69,000 in November 2021.

The picture has worsened since then, with crypto prices crashing last year. High inflation pushed the Federal Reserve to aggressively raise interest rates — a macro move that also weighed on Tesla stock, another risk-sensitive asset — with a series of frauds and glitches in the crypto industry exacerbating Bitcoin’s decline.

A write-down in the fourth quarter makes sense. Bitcoin prices hit a two-year low in November in the wake of crypto exchange FTX’s bankruptcy, which ushered in the final leg down in prices to a trough of around $15,500. Tesla’s hold through this period suggests that the company has a strong enough stomach and may be unlikely to sell even if prices fall further.

But there are reasons to believe that the picture for Bitcoin is looking up as 2023 gets underway.

Bitcoin prices have risen nearly 40% since the start of the year, amid investors with greater optimism that inflation is cooling and the Fed will become less hawkish. It’s that same optimism – which perhaps grips retail investors in particular – that has contributed to a rise in Tesla’s share price, which has risen more than 30% in 2023.

More broadly, Tesla and other corporate crypto holders are awaiting an overhaul of accounting rules that will impact how holdings of digital assets are reported.

The Financial Accounting Standards Board said in October that companies should use fair value accounting when reporting digital assets such as Bitcoin. Cryptos are currently not covered by accounting rules, meaning companies record them as “intangible assets” and write down their value if their price falls below the purchase price. Gains can only be booked if the assets are sold, confusing disclosures about long-term investments and weighing on investors’ views on the company’s crypto holdings.

A change to fair value accounting will mean that companies report their gains and losses related to crypto in the same way as traditional financial assets, a move that has been singled out as a factor that could help move the needle on institutional use of digital assets.

That may be true. But so far everything indicates that Tesla will continue to hold.

Write to Jack Denton at [email protected]