A recent change in accounting rules has added a valuation boost to Tesla’s investment in Bitcoin with $600 million in its coffers. With the new change that allows reporting crypto holdings by fair market value, the previously used rule made firms record impairment losses even though the asset had recovered later in price.
This change gives Tesla a better picture of its Bitcoin, which would help it greatly increase its bottom line as cryptocurrency prices continue to rise.
Prior to this, Tesla and other public companies had to report Bitcoin and other digital assets as intangible assets, which meant that when prices dropped, they recorded losses but could not record gains unless the assets were sold.
Under a new rule by the Financial Accounting Standards Board (FASB), companies are allowed to mark Bitcoin and other cryptocurrencies to their fair market value. Therefore, the appreciation of price is now reflected in earnings.
For example, Tesla invested $1.5 billion in Bitcoin in 2021, which led to a significant improvement in reported financials due to the new rule.
Tesla’s Bitcoin was earlier very prone to major fluctuations, where it had to mark down losses at the time of a crypto downturn while not allowed to book profits when prices reversed.
Now that Bitcoin is trading above $42,000, the company’s holding has made a strong reversal and has lifted its valuation by $600 million.
“Elon Musk’s investment into Bitcoin continues paying off, more so now, under the new accounting rules, according to a financial analyst.” Mark Reynolds mentioned that this was a change to remove a massive reporting disadvantage allowing companies like Tesla to more aptly reflect holdings in digital assets.
Tesla made headlines at the beginning of 2021 when it was one of the first major firms to invest in Bitcoin, making it one of the first such institutions to pursue institutional crypto investment. The firm briefly accepted Bitcoin as a method of payment for its vehicles; however, following environmental concerns, it suspended the Bitcoin payment program and has since shown signs of intent to accept.
Despite market volatility, Tesla has kept a percentage of its Bitcoin holdings and sells small portions for liquidity management at times. The latest accounting change further reinforces the strategic value of holding cryptocurrency for long-term appreciation.
Tesla’s $600 million Bitcoin boost may encourage other companies to revisit crypto investments now that fair value accounting makes reporting gains easier.
This, according to crypto analyst Sarah Mitchell, is “a game-changer.” She said that up until now, corporations were reticent about holding Bitcoin, mainly because the accounting treatment of it was adverse. Now we may see increased institutional adoption.
Other companies that hold crypto including MicroStrategy and Block formerly Square are likely to benefit from the accounting change.
And given the rise in Bitcoin’s price, coupled with new accounting rules, it looks like Tesla’s cryptocurrency strategy is beginning to reap the desired rewards. The automotive company’s financials may see a higher increase, should Bitcoin’s rally hold its position.
Tesla’s ability to adapt and calibrate to changes in the market while cornering the square of digital assets has left it as a tech leader not only in electric vehicles but also in corporate adoption of cryptocurrency.
A $600 million boost for Tesla from Bitcoin under new accounting rules is a win for the company and the broader cryptocurrency market. It opens up the possibility of greater corporate Bitcoin adoption under the accounting change, which may spur further institutional investment in digital assets.
