In case you missed it, on Monday green energy pin-up Tesla announced it had spent $1.5bn on bitcoin in January in its 10-K filing.
Plenty of takes, of course, followed. Questions raised include whether Elon’s pumping of the coin earlier this year will attract regulatory scrutiny, why a ‘technology’ company would spend more than its entire research and development budget on a Keynesian beauty contest and whether other corporate treasuries will follow suit. (FT Alphaville’s answers to those questions is: no, you’re getting warmer, no.)
One aspect of the funny money purchase that’s been less poured over, however, is what it might mean for Tesla’s results in the future. So here’s a quick explainer to tide us over while we wait for the next piece of ridiculous news to drop about the c$800bn-seller of hopes, dreams and electric cars.
First is the question of how Tesla will account for its bitcoin on its balance sheet which, helpfully, the 10-K expanded on. From page 106 (with our emphasis):
As of 31 December 2020, Tesla had $520m of goodwill and intangible assets on its balance sheet, so expect to see that figure at least quadruple by the next set of quarterly results. Assuming Tesla doesn’t make an acquisition in the next three months, of course.
One quick observation here — the cryptocurrency’s classification as an intangible asset only adds further weight to the already overwhelming argument that bitcoin is not a currency. In fact, Tesla includes US government bonds in its cash and cash equivalents, suggesting sovereign debt is far more of a convertible store of value than the king crypto. After all, no one has ever needed to run an impairment test on the dollar, or a Treasury note.
But the crucial question here is, how will it impact Tesla’s bottom line? Well, the company answered that also. The paragraph quoted above continues:
So, in short, Tesla will not recognise a gain on the value of its bitcoin unless some are sold. However, it will recognise a loss if the crypto falls below the price at which the electric vehicle maker purchased its allocation over an accounting period, even if the coins are not sold. It is not clear from this language, however, which bitcoin exchanges Tesla is referring to, or whether the “lowest price” is an average, or refers to the very lowest price quoted at any one time. We’ll just have to wait and see.
What is clear, however, is that unless Tesla sells its bitcoins for a profit, the accounting treatment for its crypto position is skewed to the downside. If the crypto is as volatile over the next year as it has been over the past one, its fair to speculate that losses might be greater than expected in at least one quarter this year.
The only certainty here, however, is that it will make Tesla’s GAAP profits, both pre- and post-tax, even further detached from reality than they were before. FT Alphaville notes that the company’s bottom line has been heavily distorted by the pure profit zero emission credits it sells to other auto companies, and wild swings in the price of bitcoin are only going to make unpicking the accounting reality from the headline numbers even harder. Particularly if the company does realise any gains from selling bitcoin to offset losses from its core business lines. A decision that could be taken by the company once it’s clear how a quarter’s numbers are going to pan out.
FT Alphaville isn’t sure what to make of this episode bar the fact its yet another distraction from Tesla’s ongoing struggle to make its core automotive business consistently profitable.
But then again, perhaps that’s the entire point.
Related LinksA month-old Reddit post appears to make public Tesla’s bitcoin strategy — FT AlphavilleTesla’s bitcoin bet is unlikely to have many corporate copycats — FTTesla profits held back by Elon Musk’s pay and cheaper models — FT