In the midst of a severe drop for bitcoin, Tesla’s large bet on the cryptocurrency is starting to appear like a mistake. While adding bitcoin (BTC-USD-14.6%) in early 2021 seemed like a good idea for the rest of the year and even into early 2022. The tables have changed dramatically in recent months. Bitcoin’s price has dropped by about 50% in the current quarter. Thus it indicates that Tesla’s upcoming quarterly report will be disappointing.
The bitcoin issue adds another tailwind to the Austin-based automaker. It grapples with a number of negative consequences, with a decrease of about 50% year over year and down more than 7% on Monday.
In the first quarter of 2021, the company invested $1.5B in bitcoin. However, there was a catch. Under applicable accounting standards, digital assets are classified as indefinite intangible assets. As a result, any drop in the fair value of assets should be recorded as an impairment charge. Whilst an increase in their value should not be recorded as a gain.
However, this upward trend proved to be fleeting. After a time of stumbling, raging inflation and macroeconomic pressures from global events triggered a massive selloff in equities.
While bitcoin has long been pitched as a non-correlated asset that may be used to protect against inflation. Its value has fallen as inflation has gained popularity.
In yet another ironic twist, the currency, which was created as a new mechanism to trust and verify transactions, has been severely harmed by opaque “stablecoins” and reckless exchange and lending platform conduct.
Bitcoin has sold out dramatically as a result of all of these factors. It leaves the remaining 38,000 bitcoins underwater on Tesla’s balance sheet. Overall, this would suggest a loss of over $450M on the remaining investment.
Of fact, unlike other companies like Microstrategy that maintain huge sums of bitcoin on their balance sheets, Tesla treats bitcoin as a sideshow. Vehicle deliveries and profits on those vehicles are plainly crucial KPIs to track as a developing automaker.
This, however, could be risked as the company’s primary growth area, China, faces severe supply chain constraints. According to a leaked e-mail from Elon Musk, the second quarter was a “really tough quarter” because to country limits and the need to raise production towards the end of June to compensate for the difficult quarter.