Tesla and their investment in Bitcoin has gone south. In their second quarter of 2022 financial report, Tesla’s investment in BTC faced a decline of $440 million amid the negative trend of the crypto market.
Tesla Investment in Bitcoin
The value of Tesla’s investment in Bitcoin in the second quarter of 2022 financial report faced a decline of $440 million amid a negative trend in the crypto market that has not yet subsided.
The electric vehicle company led by Elon Musk previously bought Bitcoin for $1.5 billion, based on financial report records in the first quarter of 2021.
This is a step in an attempt to convert a portion of their cash reserves to the number one cryptocurrency in the world. In addition to Tesla, a number of public companies that have converted part of their cash reserves into Bitcoin include Michael Saylor-led MicroStrategy, Block Inc. led by Jack Dorsey, to the crypto exchange Coinbase.
Many companies taking bets on Bitcoin have been under pressure in recent months, with the price of Bitcoin dropping sharply to the level of $17,744.9 on June 19, 2022. This event is the first time for Bitcoin since November 2020.
At the end of June or the last day of the second quarter of 2022, the price of Bitcoin made Tesla’s BTC investment shrink to around $820 million.
A Hard Blow in the Crypto Market
Tesla recorded their Bitcoin holdings worth $1.26 billion in the first quarter of 2022, while its value in the market was around $1.96 billion. However, accounting practices prevented Telsa from recording the return on its investment until it was sold.
This means Tesla is likely to record a decline in their Bitcoin holdings of around $440 million or the equivalent of 7% of the company’s total annual profit in 2021.
Rising interest rates and inflation have blunted interest in Bitcoin, while the selling price was hit by a series of crises in the crypto market including the important players involved in it, ranging from the Terra project, Celsius Network, Three Arrows Capital, Babel Finance, BlockFi, Voyager, and CoinFLEX.
Tesla has lost 44% of its value this year amid a widespread sell-off. All the while, Elon Musk’s company has struggled to keep up with demand for Teslas. This has been partly due to Covid-19 triggering a lockdown in Shanghai, China; thus making the Gigafactory factory close.
Tesla and Their Bitcoin Value Breakdown
Tesla announced that it bought Bitcoin for the first time worth $1.5 billion on February 8, 2021. The company can further diversify and maximize returns by investing a portion of the company’s cash in alternative reserve assets. Those alternative reserve assets include digital assets, gold bars, funds traded on gold exchanges, as well as other assets as determined in the future.
Then, in the first quarter 2021 financial report released on April 26, 2021, Tesla explained that they sold part of their Bitcoin worth $272 million, bringing their holdings to $1.311 billion.
In its second quarter of 2021 financial report ended June 30, 2021, Tesla reported that the value of Bitcoin they own is still equivalent to $1.311 billion. Tesla did not buy or sell the digital assets they owned in this period.
Entering the quarter of 3/2021, Tesla again did not increase or decrease their Bitcoin holdings. However, they need to report a drop in the value of the Bitcoin they own of $51 million to reflect the fall in price at the time. This brings the bitcoin value position they own to the equivalent of $1.260 billion.
Realized Profits from Bitcoin
In this regard, Tesla explained that digital assets are considered intangible assets of unlimited age based on applicable accounting rules.
Therefore, when there is a decrease below Tesla’s carrying value for the asset after the purchase, it will require them to acknowledge the existence of the decline in value. Meanwhile, Tesla cannot make revisions to price increases until the sales action is carried out.
For any digital asset owned now or in the future, these costs can negatively affect Tesla’s profitability in the period when such a decline in value occurs and even if the overall market value of these assets increases.