Tesla took a $51 million hit on its bitcoin investment in Q3 despite the token soaring 30%. Here's why.
- Tesla took a $51 million hit on its bitcoin holdings in the third quarter, its earnings showed Wednesday.
- That's despite the cryptocurrency rising around 30% across the July to September period.
Tesla posted solid third-quarter earnings on Wednesday night, with profit and revenue up sharply.
But Elon Musk's electric car company took a $51 million hit on its bitcoin investment - despite the token jumping around 30% in the third quarter.
Confused?
The answer to the riddle lies in the weird way Tesla has to account for the more than $1 billion of bitcoin on its books.
It's "very asymmetric," according to Philippe Houchois, equity analyst at Jefferies.
Houchois said Tesla has to value its bitcoin at the lowest point to which it falls over the quarter. That means it officially has to recognize a loss if it drops below the purchase price.
Under the quirky accounting rules, Tesla can't ever revise the value of its bitcoin upwards. It only gets to recognize any gains if it sells the tokens.
Tesla is thought to have bought its bitcoin for around $34,000. So even though bitcoin rose roughly 30% to $43,800 in the third quarter, Tesla had to write down the value of its holding because it fell to $29,000 at one point in July.
According to the accountants, Tesla's digital asset holding fell $51 million to $1.26 billion in the July to September period. That was down from $1.31 billion in the final quarter.
And Houchois said the peculiar rules mean Tesla won't get to boast about its investment in the fourth quarter either, unless it sells some.
Bitcoin hit a new all-time high on Wednesday of above $67,000. But Tesla is likely to face another "impairment charge" because it fell as low as $40,000 in September.
Houchois said the rules are strange, but reflect the fact that accountants think bitcoin is an "intangible asset." They reckon it's hard to properly value and may not be very liquid - despite billions of dollars worth changing hands each day.
However, Tesla's investment has been an excellent one when considering the actual gain bitcoin has notched up from January to today.
Tesla bought $1.5 billion of bitcoin in January for somewhere around the $35,000 mark, before selling 10% later in the first quarter.
Bitcoin was trading at around $66,000 on Thursday, meaning the value of Tesla's purchase has likely risen around 90% in just under a year, on paper at least.