Elon Musk is known to take risks when the markets are in troubling waters, and evidently, he has made his fortune by actively pursuing such opportunities. The buying of Bitcoin was not so different for him too. Tesla did buy Bitcoin when the asset was doing just fine for itself, staying above $50K, but now, when the market is in a freefall, the situation has changed drastically.
Impairment Charges on Bitcoin Holdings
Accounting rules suggest that whenever there is a decline in the face value of an asset that the company has on its financial sheet, the company needs to pay impairment losses according to the overall loss sustained for that specific asset. In this case, Tesla is to pay $170 million in impairment charges for Bitcoin, and this is only the first half of 2022. Ironically enough, a $64 million gain was also witnessed in the sales of the same asset.
Many companies seek to diversify their portfolio for all kinds of reasons and to have different products on their balance sheet, this is exactly what Tesla did, opting for Bitcoin, but the whole thing has kind of backfired. The higher volatility of the crypto assets is making it even harder for companies to consider investing in the crypto space. In May, the accounting service board agreed to review these accounting rules for Tesla, but a formal argument is yet to take place.
As it is a direct asset that Tesla is holding on its balance sheet and is not in union with some other partner firm or associate, any negative impact on the value of the asset is also going to negatively impact the overall value of Tesla, which transpires into a decrease in its stock price, loss of confidence among the board members and stakeholders as well.
It isn’t clear yet if Tesla is totally going to dump all of these bitcoin assets or if it will come up with something else because if the company continues to deal with these impairment charges, then it is going to have serious consequences for it.