Tesla: bitcoin impairment suggests crypto investments are on hold

Tesla Inc updates

Elon Musk claims electric car company Tesla accounts for “two-thirds” of his personal and professional pain. If bitcoin prices fail to recover, it will be responsible for more. No wonder he plans to avoid most of the company’s future earnings calls.

The cryptocurrency’s sharp sell-off this year led the electric car company to report a $23m impairment in the second quarter. Tesla announced in February it had purchased $1.5bn of bitcoin the previous month in order to “maximise returns on our cash”. The company talks up bitcoin’s liquidity. Volatility is more notable. Prices rose, then fell. Tesla’s bitcoin holdings were worth $1.3bn at the end of the second quarter.

Unrealised gains and losses tend to be recorded using mark-to-market accounting. But Tesla accounts for bitcoin as an “indefinite-lived intangible asset”, a category usually associated with franchises. This means it does not recognise a gain unless it sells bitcoin. Gains appear as reductions in operating expenses. Losses must be recorded if the price drops below the acquisition price. It is not clear what Tesla paid but the highest bitcoin price in January exceeded $40,600. Today it is $37,000. 

Of course, Tesla’s bitcoin problem is partly self-inflicted. Prices plummeted in May after the company declared it would no longer accept bitcoin as payment due to environmental concerns over the use of fossil fuels in bitcoin mining. Musk’s recent claims that Tesla can still help bitcoin miners to switch to renewable energy and will accept bitcoin as payment in the future have spurred a mild price rise. 

Tesla’s cash pile is sufficiently large — $16bn at the end of the last quarter — that its bet on bitcoin has not put too large a dent in its cushion. But it is an unwelcome distraction. In the last quarter, Tesla’s margins rose in spite of supply chain problems and revenue from carbon credits falling. Bitcoin adds unnecessary volatility to a company that it still trying to prove its core business has longevity.

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