A year ago, on February 8, Tesla revealed that it had added $1.5 billion worth of bitcoins to its balance sheet, opening itself up to three big risks, according to a strategist.
When companies like Tesla and MicroStrategy use cash to invest in crypto, they risk monetary losses, loss of investor confidence and accounting issues, said Jerry Klein, chief executive of the New York-based investment firm. , Treasury Partners, which has $19 billion in assets. under management.
“Companies could lose a significant portion of their cash by investing in bitcoin,” he wrote in an email to Insider, adding that the penalty for losing that capital can be “severe.”
“Investors in public companies have never tolerated the losses associated with corporate cash investments,” he said. “If a public company were to suffer a significant loss on its cash investment, investors could lose confidence in the company.”
Bitcoin purchases also come with “heavy bookkeeping,” Klein said. Because cryptocurrency is treated as an intangible asset, companies must recognize unrealized losses and can only recognize gains by selling the bitcoin, creating a “dead end situation”.
For example, Tesla disclosed in October that it took a $51 million impairment charge for its bitcoin holdings in the third quarter. And MicroStrategy, the software company run by bitcoin bull Michael Saylor, said late Tuesday that it took a $146.6 million fourth-quarter impairment charge on its bitcoin holdings, down from $65.2 million. dollars in the previous quarter. As of January 31, the company had 125,051 bitcoins in its vaults which it purchased for $3.78 billion.
According to Klein, the purpose of corporate cash is “capital preservation,” not appreciation, which is why companies should focus on safe, liquid assets like fixed-income securities, rather than stocks. volatile assets like cryptocurrencies.
Bitcoin, the largest cryptocurrency by market value, has long been a volatile asset. The cryptocurrency hit an all-time high of around $69,000 in November and has since fallen below $40,000 amid a broader market rout. But, since its inception in 2015, the cryptocurrency has surged more than 11,000% on Wednesday, and some have predicted it could hit prices above $100,000 or more.
Even so, Klein said CFOs aren’t interested in “speculative investments” that could affect earnings.
“Return on capital is more important than return on capital,” he wrote.