Tesla announced, as part of their Q2 earnings (published July 20th, 2022) that they had sold $936 million of Bitcoin (“BTC”) (75% of their holdings) causing the BTC price to fall by 1.7%. To many this seems counterintuitive to sell below the price they paid, especially given their bullish long term stance on the digital asset.
But the accounting treatment forced their hand under the adverse macro economic conditions. If Tesla needed to sell its BTC reserves, then there will likely be additional public companies that need to dispose of their BTC holdings also. There’s systemic risk in the market with BTC dictating the direction of general crypto price action, so any large movements in BTC price action will have ripple effects across the entire ecosystem.
This article provides some context for the rationale behind the disposal and reviews the impact on the wider cryptocurrency market.
Tesla leads the global EV industry with 14% of the market share. The EV market has had huge growth in recent years, particularly in Europe and China. China capitalized on first mover advantage, established itself as the worlds largest EV market and are Tesla’s largest customer:
Tesla’s EV deliveries have been performing well, consistently with the wider EV market:
Tesla’s H1 ‘22 deliveries are already on track to outpace the prior year, albeit slightly behind their ‘22 target due to fears of further lockdowns in China. The Shanghai lockdowns in April curbed Tesla’s EV production at their Chinese factory, while their European manufacturing plants were racing to be production ready.
Tesla continues to perform well, despite the adverse economic climate. They’re an innovative business that continues to push the boundaries of technology and have long been an advocate of cryptocurrency. The company acquired $1.5 billion of BTC in February 2021 when the price fluctuated between $30-$40k. Since then we’ve had a roller coaster, with blow off tops in May ($64k) and November 2021 ($67k), then a tumble to $17.6k in June 2022. As of writing the BTC price is $23k USD, down 72% from all time highs.
Tesla stated in their 2021 SEC filings that:
“we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.”
Since then the EV maker had halted payments in cryptocurrency, citing concerns over climate change given the Proof of Work (“PoW”) mechanism of validating transactions on the BTC network. Refer to the Ethereum merge OriginsNFT article for discussion around Proof of Stake (“PoS”) versus PoW networks.
Elon Musk stated he is open to boosting Tesla’s BTC exposure in the future. We should however take this with a pinch of salt as it could pivot depending on Tesla’s financial position and the macro market conditions.
Let’s take a look at why the accounting treatment plays a large part in the BTC disposal for Tesla and other publicly listed companies.
Tesla’s BTC holdings are accounted for as a digital asset (intangible) under ASC 350 (Intangibles - Goodwill and Other). We can see this is consistent with the their policy disclosed in their financial statements (extract below). Fancy words, but what does it mean?
Well, if you were to purchase BTC at $60k and it fell to $30k, then the fair value (quoted market price) is below the amount you paid, so there’s an indication of impairment. You would need to write down your BTC holdings by 50% in this example - A one off loss to the income statement!
But surely if the price goes up you can recognize the up side? In short, no you cannot. If the BTC price goes up and you’re in need of cash, it forces your hand to realize any profits since the adverse impairment charge has already been incurred. That’s what Tesla has done here.
Let’s take a look a their recent numbers (baring in mind these are unaudited, hopefully no misstatements hiding in the woodwork!):
This is based on a comparison of Q2 ‘22 and Q4 ‘21, given this was the last audited (more reliable) ‘Balance Sheet’:
Did Tesla need to sell their BTC? No - they’re in a very healthy position. But capitalizing on the up side of BTC disposal is logical when the macro conditions are not optimal.
While there was nothing unsurprising coming out of the Federal Open Market Committee (“FOMC”) it is likely that there will be more hawkish actions taken in the future, so planning for the worst is a sensible strategy - cash is king in a bear market after all. @omega_eth provides a good thread on the the FOMC meeting.
So if Tesla has taken this approach, what will other publicly listed companies do? Let’s take a look.
This BTC accounting treatment is relevant for all other US regulated companies. In fact many of the global companies follow similar treatment under International Financial Reporting Standards (“IFRS”).
Tesla is the first, but suspect they will not be the last. In fact it is probable that more companies will do this over the coming months, particularly those that are in stressed financial positions and bought BTC at higher prices. What does this mean to the price of BTC? Well there will be additional sell pressure and if there are several large institutions that need to liquidate holdings at once then this could cause a sudden dump in the price, exacerbated by liquidations from leverage in the market.
With this in mind lets take a look at some of the publicly listed (subject to these accounting standards) companies with large BTC holdings:
Microstrategy is the largest holder of BTC, as far as public companies are concerned. We know that they are very bullish on BTC and have sufficient collateral to allow the price of BTC to fall to $3,562 before they are margin called. They are unlikely to sell given it would go against everything Micheal Saylor (Microstrategy CEO) has advocated for, but if there is pressure from the investors then it’s not an impossible outcome.
The remaining top 10 hold less than 80k BTC (equivalent to 62% of Microstrategy’s holdings). Voyager Digital recently declared bankruptcy and is currently receiving takeover offers from the likes of FTX to acquire the business. Depending on how this resolves itself we could see some movement in their BTC reserves as they settle their liabilities.
Taking a look at the bigger picture, we can review the distribution of BTC holdings by wallet as from the Bitinfo-charts:
Only five public companies have more than 10k BTC holdings, whereas there are another 91 wallets with more than 10k BTC. This suggests there are private companies, governments and high net worth individuals that also hold this amount in their reserves, that may not be subject to the same accounting standards.
So while we see the news that a public company with large BTC holdings has sold their reserves, the price impact is more likely from markets reacting to the news as opposed to the actual price action from the disposal. The BTC was probably sold over the counter rather than on exchange, or at least a combination of the two. In fact 62% of BTC is held in 15,867 wallets, each with more than 100 BTC. The minimal price action (1.7% movement) after the Tesla announcement wasn’t a particularly big swing for crypto volatility.
While BTC currently dictates the price trend in crypto, we could see a change with the Ethereum merge expected to go live from September 2022. There may be a decoupling between Ether and BTC following the fundamental shift in supply / demand mechanics for Ether. Refer to the OriginsNFT article for more information on the merge.
The rationale for Tesla’s disposal of its BTC holdings seems reasonable, however we will likely see a number of other publicly listed companies make similar disposals if they anticipate liquidity issues. Particularly given these large corporates have probably already incurred the down side from booking the impairment losses, given the accounting requirements.
The current accounting standards for BTC as an intangible asset may end up driving business decisions that seem counterintuitive, and potentially counterproductive. Adding unnecessary sell pressure in the market. Further hawkish action from the Federal Reserve could lead to more liquidity issues and poor corporate performance. This could drive crypto prices down further, until something breaks, or the market sentiment shifts.
We are navigating uncharted waters in both macro and the crypto market. Past cycles can be used to help predict future price action, although there are a combination of several variables that make this experience novel. Buckle up - it’s going to be a volatile and potentially unpredictable ride. Either way, while there is a slight bear market rally underway I suspect there is more downside in the short to medium term, before we resume an upward trend on longer timeframes.
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