Impairment is the reduction in the value of an asset below its book value. It is calculated by subtracting the asset’s current value from its acquisition cost. The term is often used in traditional finance but has also been doing the rounds in the cryptosphere lately. This is after major institutional Bitcoin (BTC) holders declared massive impairment losses as part of their Q2 revenue reports.
Organisations like Tesla, MicroStrategy and Block Inc. all invested heavily in Bitcoin over the last couple of years. Tesla’s BTC purchase worth $1.5 billion even set off a bull run that saw Bitcoin hit an all-time high (ATH) of $69,000 in November last year. However, bears have taken over the market since then, and BTC is currently languishing around the $23,000 mark over the last month or so.
Tesla
This has resulted in massive impairment charges for institutional giants. It forced Tesla to trim its BTC holdings by over 75 percent during the second quarter of 2022, netting a cool $64 million in profits. However, as BTC stooped to a low of $18,731 at the end of the quarter, the electric car manufacturer also registered an impairment loss of $170 million on the remainder of its BTC holdings.
MicroStrategy
Things look even worse for MicroStrategy. Since August 2022, the business intelligence and software company purchased nearly 130,000 BTC at an average cost of $30,664 per coin. However, in its Q2 revenue report, the company reported an impairment charge of more than $915 million.
When BTC was trading at $69,000 towards the end of last year, MicroStrategy’s Bitcoin holding was worth $8 billion. However, with prices nearly 70 percent lower than the ATH, the company’s BTC stockpile is now worth $2.9 billion.
Block
Another company reeling from falling bitcoin prices is Block Inc., formerly Square. The American financial services and digital payments company founded by ex-Twitter CEO Jack Dorsey holds more than 8,000 BTC, which it purchased for around $200 million. However, like Tesla and MicroStrategy, it too suffered when bitcoin prices tumbled, resulting in an impairment loss of $36 million.
Future outlook
Despite the setbacks, these institutional holders seem bullish on Bitcoin. For instance, MicroStrategy added to its Bitcoin stockpile towards the end of June, purchasing ~480 BTC worth around $10 million.
In addition, Michael Saylor stepped down from his position as CEO of the company and assumed the position of executive chairman. In the press release, he said his new role would allow him to focus solely on “Bitcoin acquisition strategy and related Bitcoin advocacy initiatives,” a bold statement given the company’s Q2 earnings report.
Elon Musk was also optimistic about Bitcoin. In a series of tweets that followed the earnings call, Musk said that Tesla’s sale shouldn’t be seen as a “verdict on Bitcoin” and that the company is "open to increasing" its Bitcoin holdings in the future.
Out of the three companies, Block Inc. is the only one that plans to slow investments. Perhaps, this has something to do with the fact that its total net revenues fell 6% year on year (YoY), as opposed to the 143% YoY increase in Q2 2021. Block Inc.’s Bitcoin payment arm, Cash App, also suffered losses, with its Bitcoin revenues and profit dropping 34% and 24% YoY, respectively.
Conclusion
Bitcoin has quickly transitioned from a speculative asset to mainstream investment. According to CoinGecko, more than 25 listed companies have Bitcoin on their balance sheets. This is because, in the short while this digital currency has been around, it has proved to be a great store of wealth, hedge against inflation and a cyclic asset class. Therefore, if past performance repeats itself, the price of bitcoin should bounce back, and investor coffers will rise with it.
(Edited by : Abhishek Jha)
First Published: Aug 10, 2022 11:46 AM IST
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