The price of Bitcoin won’t stop falling, which means Tesla ‘s Bitcoin holding is now very likely below where the company purchased its position. If that’s the case, an impairment loss will be recognized in the electric vehicle maker’s coming second-quarter earnings report, unless prices recover.
Bitcoin was down about 12% Sunday morning compared with Saturday prices, trading below $34,000. The leading cryptocurrency is down about 48% from its April 52-week high of more than $64,000.
Tesla (ticker: TSLA) disclosed an initial $1.5 billion position in its annual report filed in early February. Back then, Bitcoin was trading at about $38,000. The average price of Bitcoin between Tesla’s fourth-quarter conference call on Jan. 27—Tesla did not say that it had any Bitcoin holdings at that time—and the annual report filing on Feb. 8 when Tesla’s holdings were first reported was about $36,700.
That’s a proxy for what Tesla paid. Tesla has not responded to requests for comment about its Bitcoin holding and wasn’t immediately available to comment Sunday.
Early on, Tesla’s Bitcoin position looked like a great investment, and the price of the cryptocurrency raced higher after Tesla’s stake was disclosed. At the end of the first quarter, Tesla’s stake had grown to $2.5 billion even after a small sale.
But crypto gains are only recognized on the sale. Tesla recognized a roughly $100 million gain even though it had made more than $1 billion on its initial purchase. Bitcoin values aren’t marked to market like holdings of stocks. When a company holds stock, the change in value from quarter to quarter is recognized as an expense or gain in the income statement. What’s more, losses on cryptocurrency holdings aren’t recorded until the value of crypto assets have been impaired—or fallen below their carrying value on a company’s balance sheet.
Based on average prices, Tesla likely held about 42,000 Bitcoins at the end of the first quarter. With recent price moves, the company is likely looking at an impairment loss of roughly $125 million. Unless Bitcoin prices gain between now and the end of June, the loss would be recognized in the coming quarterly report in July. Tesla reported second quarter 2020 earnings on July 22.
The loss is small relative to the size of the $560 billion company.
Bitcoin has become something of a distraction for Tesla investors. After buying a stake and accepting the cryptocurrency as payment for vehicles, Tesla stopped taking Bitcoin as payment about 10 days ago, citing the environmental impact of crypto mining.
Tesla stock is down about 2% since Tesla made the announcement. The Nasdaq Composite, home to many growth stocks, is up about 3%. In 2020, Tesla stock rose more than 740%. Shares are down about 18% year to date, trailing behind comparable gains of the S&P 500 and Dow Jones Industrial Average.
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