Tesla has been hit hard by the fall in the crypto market. In its second quarterly report of the year, the firm reports a $440 million decline in the value of its Bitcoin investments.
Tesla’s Bitcoin investment: a risky bet
Due to the negative trend in the crypto market, the value of Tesla’s Bitcoin investment fell by $440M in the second quarter of 2022.
In order to diversify its reserve portfolio, the electric car company led by Elon Musk purchased a total of $1.5 billion worth of BTC.
In addition to Tesla, several publicly traded companies have converted part of their cash reserves into Bitcoin. Some of these companies include Michael Saylor’s MicroStrategy, Jack Dorsey’s Block Inc, and crypto exchange Coinbase.
Other companies that have made the bet to bet on Bitcoin are biting their fingers right now, especially when it hit a low of $17,744.9 on June 19, 2022. A price that has never been so low since November 2020.
At the end of June or the last day of the second quarter of 2022, the asset’s price tumble caused the value of Tesla’s BTC investment to drop to around $820 million.
A blow to the crypto market
In Q1 2022, Tesla reported $1.26 billion in Bitcoin reserves, while the value of its market holdings was around $1.96 billion. However, due to accounting standards, Tesla could not account for its return on investment before selling.
This means that Tesla is expected to see a decline of around $440 million in its BTC holdings, equivalent to 7% of the company’s total annual profit in 2021.
Rising interest rates and inflation have dampened interest in Bitcoin, while its price has tumbled due to a series of crises in the crypto market, including the collapse of Terra (LUNA), Celsius Network , Three Arrows Capital, Babel Finance, BlockFi, Voyager and CoinFLEX.
Due to a massive sell-off, Tesla stock has lost 44% of its value this year. Elon Musk’s company has also struggled to meet demand for its electric vehicles. This is partly due to the sanitary confinement in Shanghai, China and the closure of the Gigafactory.
Tesla’s Bitcoin Purchases
On February 8, 2021, Tesla announced for the first time that it had purchased $1.5 billion worth of BTC. The company wanted to diversify and maximize its returns by investing some of its cash in alternative reserve assets. These include digital assets, gold bars, funds traded on gold exchanges, as well as other assets.
Then, in its first quarter 2021 financial report, Tesla said it sold the equivalent of $272 million of its Bitcoin reserves, bringing its total holdings to $1.311 billion.
In its second quarter 2021 financial report, Tesla said the amount of its reserves remained stable at $1.311 billion. This means that the company has neither bought nor sold BTC.
In Q3 2021, Tesla did not increase or decrease its Bitcoin holdings. However, the value of its reserves fell to $1.260 billion due to the fall in the price of BTC.
Profits made on Bitcoin
Tesla explains that current accounting rules consider digital assets as intangible assets of unlimited age.
Therefore, when the price of the asset falls after the purchase, the company must report a decline in value. Tesla, however, cannot revise price increases until the sell action is taken.
For any digital asset held now or in the future, these costs may adversely affect Tesla’s profitability during the period such a decline in value occurs. This, even if the overall market value of these assets increases.
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