"Buying Coins Too Aggressively" Micro-strategy Costs Approaching Market Price, Tesla Has Fallen Below Cost, Second Quarter Financial Report May Show Losses

MicroStrategy's CEO Michael Saylor, who has shown a religious fervor for Bitcoin, has spared no effort in buying coins for his company. However, as the cryptocurrency market has plummeted significantly, the price of Bitcoin is now very close to MicroStrategy's average cost. What impact might this have?

MicroStrategy Makes 14 Purchases, Three Rounds of Fundraising, Total Spending of $2.741 Billion

According to statistics, since August 2020 when MicroStrategy first announced the purchase of Bitcoin as a corporate asset, there have been a total of 14 purchases.

• The largest purchase in terms of Bitcoin quantity was in December 2020, with a total of 29,646, purchased at an average cost of $21,915 per Bitcoin.
• The largest spending occurred on February 24, 2021, totaling $1.026 billion, purchased at an average cost of $52,765 per Bitcoin.
• The smallest spending occurred in January, February, March, and May 2021, each totaling $10 million.
• The purchase at the highest point was on April 5, 2021, spending $0.15 billion, purchased at an average cost of $59,339 per Bitcoin.
• The purchase at the lowest point was in September 2020, purchasing 16,796 Bitcoins at an average cost of $10,419 per Bitcoin.

In addition, MicroStrategy also issued bonds to raise funds to purchase Bitcoin. They issued $550 million in December 2020, $1.05 billion in February 2021, $500 million in June 2021, and subsequently added another $1 billion, which had not been completed by the time of this report.

Bitcoin Price Plunges, MicroStrategy and Tesla May Report Paper Losses

Based on U.S. Generally Accepted Accounting Principles, as there are currently no direct accounting standards for digital assets, Bitcoin cannot be directly recognized as "Bitcoin." Therefore, both MicroStrategy and Tesla, two publicly traded companies, record Bitcoin as intangible assets in their financial reports to record the related asset amounts, and possible expenses or losses. Both companies use the term digital asset for description.

It is worth noting that these Bitcoin assets can only be recognized as income after they are sold; the increase in value from holding alone cannot be recognized, financial reports will only record the purchase cost; however, when the market price is lower than the purchase cost, losses will be recognized in quarterly financial reports. For specific accounting rules, see the detailed explanation below.

We can already anticipate the second-quarter financial reports, where Tesla may record losses due to Bitcoin, or income from selling; if the price of Bitcoin drops below $26,000, MicroStrategy, which only holds without selling, will also have to recognize losses.

Bloomberg also covered this issue. MicroStrategy's most recent purchase cost $489 million, with an average cost of $37,617. Shortly after the purchase was announced, Bitcoin fell to $31,735, prompting Bloomberg to report a potential $77 million loss. However, since quarterly financial reports are based on the average cost of all holdings, the loss may not necessarily occur.

Related reviews: "Tesla Sells 10% of Bitcoin, Musk: Just to Prove Liquidity, Personally Did Not Sell Any Bitcoin"

Related reviews: "Accounting Rules Require Selling Bitcoin? Musk's Post Breakup with Bitcoin, Sun Yuchen Wants to Take Over"

Accountant Explains Relevant Accounting Rules

According to Hsu Kao Cheng, CEO of Maxuho Information Technology and a U.S. accountant Hsu Kao Cheng, U.S. public companies use the U.S. Generally Accepted Accounting Principles (US GAAP), which differs from the International Financial Reporting Standards (IFRS) commonly used by Taiwanese companies, with different regulations.

How is Bitcoin Recognized in the U.S.?

U.S. accountant Hsu Kao Cheng explains:

Firstly, according to US GAAP ASC 350 Intangible Assets - Goodwill and Other ASC 350, Intangibles–Goodwill and Other, for indefinite-lived intangible assets, the accounting treatment for assets such as Bitcoin is categorized as "digital assets" and initially recorded at cost.

After the purchase of these digital assets, subsequent measurement will be recorded at cost less impairment losses net in the consolidated balance sheet.

Using Tesla's First Quarter as an Example

Hsu Kao Cheng states: "Taking Tesla's first-quarter financial report as an example, Bitcoin is listed as net under assets, in the Digital assets accounting category. At the same time, in the Statement of Cash Flows, under Cash flow from investing activities, the cash outflow for purchasing digital assets is recorded at $1.5 billion and the cash inflow from selling digital assets is $272 million."

Recognition of Losses When Bitcoin is Below Cost

Hsu Kao Cheng states: "Tesla mentioned that because the company wants to hold Bitcoin for the long term, even if the overall market value of digital assets rises in the long term, there may still be negative impacts on profitability due to impairment losses that may occur, and the recognition of impairment losses is measured quarterly.

If the carrying value of the digital asset exceeds the fair value based on the lowest price quoted in the active exchanges during the period, Tesla will recognize the difference between the carrying value and fair value in the consolidated balance sheet."

Recognition of Income Only When Selling Bitcoin

Hsu Kao Cheng states: "For digital assets recognized under the cost basis, income will only be recognized upon sale, even if there is an increase in the quoted price on the primary exchange, no accounting adjustments will be made."