Elon Musk’s bad bet: Bitcoin’s sudden dive will hit Tesla with a Q2 loss

June 23, 2021, 12:30 AM UTC

Just before 9 AM on June 22, Bitcoin’s price sank to $29,511, its lowest level since the early hours of January 2, and 55% off its all-time record of $64,863 achieved just ten weeks ago. This is bad news for all crypto investors, but especially so for BTC’s chief influencer, Tesla CEO Elon Musk. The reason: Musk likely bought every Bitcoin on Tesla’s books at a higher price. The upshot is that in Q2, Tesla will be taking a substantial write-down on the celebrated wager that helped launch the bull run that’s turned into a freefall.

By just after noon, Bitcoin had surged back to around $32,000. As we’ll see, that relief rally won’t save Tesla from booking a hefty charge.

In its 10K released on February 8, Tesla disclosed for the first time that it had purchased $1.5 billion in Bitcoin. We know that Tesla bought all of its coins between January 1 and February 8, the date of its annual report. By my calculations, it purchased roughly 46,000 coins at an average of $32,600. It’s unlikely that Tesla acquired any of its holdings for less than the $29,511 reached on June 22, since Bitcoin hovered below that threshold for only a single day, January 1. On January 2, it surged to over $32,000, never to drop below $30,000 until its new tumble breaching 30k.

Hence, all of the Bitcoin on Tesla’s balance sheet went at least briefly underwater on June 22. In Q1, it sold 10% of its holdings, or 4,600 coins, at $59,000, booking a $101 million gain. But assuming it hasn’t unloaded any more, and Musk in his frequent tweets on Bitcoin has only referenced the one sale, Tesla still holds 41,400 coins in its treasury. By my calculations, the EV-maker paid an average of $32,126 for those coins. So at what’s so far the June 22 low of $29,511, it was sitting on a loss of $2,615 per coin, for a total hit of $122 million.

That paper deficit means Tesla’s careened from what was once almost $1.5 billion in paper gains plus the $101 profit on the 10% sale, to what would be an overall loss of $21 million if it sold everything at $29,511. But Bitcoin fanatics claim that it price could easily go on another moonshot, sending Tesla’s holdings back into positive territory––indeed, they expect that to happen, and Musk probably does, too.

The problem is that even if Bitcoin rebounds, Tesla’s deploying an accounting system that will force it to book a sizable Q2 loss on its daring investment. The Financial Accounting Standards Board (FASB) classifies Bitcoin and other cryptocurrencies as an “indefinite lived intangible assets.” That designation means that companies holding Bitcoin must take a charge called an “impairment” in quarters where the market price falls below the what Tesla paid, but can’t take a gain when their value rises above their acquisition cost.

Tesla’s picked an unusual, and conservative, system for booking losses. It chose not to follow the more common method of taking a write down on the whole portfolio when Bitcoin’s price at the close of the quarter is lower than the average paid for the coins on its books. Instead, Tesla tracks its cost for each individual batch of Bitcoin, and if at any time during the quarter that individual batch is trading below its purchase price, the EV giant books an impairment for the difference.

So for accounting purposes, it doesn’t matter if Bitcoin jumps into the mid-$30,000s and puts Tesla’s holding back in the black. The charge doesn’t go away. Because the price fell to $29,511, Tesla’s obliged to take an impairment on every coin that it bought for more than that number. And it appears to have paid more for all the coins in its war chest. As a result, Tesla in Q2 will need to shoulder a pre-tax loss that I estimate at the full $122 million. That’s the total difference between the cost of each slug Tesla purchased, and the $29,511 low.

Of course, Bitcoin could just as easily sink well below that mark as go on another tear. If it hits $25,000 before the Q2 close on June 30, the loss will go to around $300 million. A drop to $20,000 would lift the impairment to around $500 million.

Even a $122 million ding is a big deal. It’s equal to 20% of the pre-tax income Tesla garnered in Q4 of 2020, and all but $15 million of that total flowed not from selling cars and batteries, but trading regulatory credits to rivals, a sideline it acknowledges will decline rapidly. Tesla’s shareholders are craving good news about Tesla’s EV sales. The last thing they want to worry about is how a crazily careening wager on Bitcoin could swamp its profits on cars in the quarters to come. Elon Musk controls what happens to Tesla. But he’s tied the carmaker’s future to a speculative flyer whose fortunes are skidding are out of his control.

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