Bitcoin may not be replacing cash as a medium of exchange anytime soon. However, it is starting to replace cash on the balance sheet of some high-profile companies.
Two such examples are Tesla (TSLA) - Get Tesla Inc Report and Square (SQ) - Get Block Inc Class A Report, both of which have declared a commitment of hundreds of millions of dollars and more to bitcoin.
Square was in early on the action, announcing it had purchased $220 million worth of bitcoin in 2020, representing about 5% of its total cash at the end of the year (those holdings are now worth approximately $469 million).
“Aligned with the company’s purpose, Square believes that cryptocurrency is an instrument of economic empowerment, providing a way for individuals to participate in a global monetary system and secure their own financial future,” the company said in its announcement, and CEO Jack Dorsey has said in the past that he expects bitcoin to eventually become the world’s single currency.
But Tesla made an even bigger splash when it revealed in an SEC filing earlier this year that it had invested $1.5 billion of its cash in bitcoin. In a Feb. 18 tweet, Musk called bitcoin “simply a less dumb form of liquidity than cash,” and noted that “when fiat currency has negative real interest, only a fool wouldn’t look elsewhere.” Musk further noted in a conversation on Clubhouse earlier this year that “I think bitcoin is really on the verge of getting broad acceptance by conventional finance people.”
Consistent with that sentiment, Tesla announced in March that it would begin accepting bitcoin as payment for its vehicles, and that bitcoin paid to Tesla would be retained as bitcoin and not converted to fiat currency.
Tesla and Square are not alone in their fondness for bitcoin. Other companies with significant amounts of bitcoin on their ledgers include data intelligence company MicroStrategy (MSTR) - Get MicroStrategy Incorporated Class A Report (over $5.3 billion worth) and Marathon Digital Holdings MARA (almost $292 million worth).
However, the question of whether retail investors should regard this as a good thing remains an open question.
Primarily, retail investors need to take note of the idiosyncratic accounting rules for bitcoin. As a novel addition to corporate balance sheets, it might be unsurprising that regulations are somewhat complicated and not entirely tailored to the newfangled asset class.
According to Generally Accepted Accounting Principles (GAAP), acquired digital assets are considered to be intangibles and so should be accounted for at the price they were purchased and, from that purchase price, can be marked down. However, the same allowance for accounting changes is not permitted for price appreciation in bitcoin or other crypto-assets.
This is a crucial detail as it means that their value can only decrease in GAAP-compliant SEC filings. Also a recovery in price from a prior decline can only be marked up so far as to return to the original cost basis. Given the volatility of cryptocurrencies, this is a concern for investors parsing these documents prior to investing.
Clarifying statements are certainly permissible in company disclosures and subsequent investor calls, but the reflection on the balance sheet is sure to be impacted in any GAAP measures. As a result, many firms are likely to opt for more detailed, non-GAAP disclosures to keep investors abreast of the fluctuation of cryptocurrency valuations.
Nonetheless, the accounting issues add another problem for more conventional investors, many of whom are already skeptical about crypto assets and precisely how to value them.
“Companies putting bitcoin on their balance sheet should be viewed as a significantly speculative move,” Dr. Robert Johnson, Professor of Finance at the Heider College of Business, commented. “I believe that companies putting bitcoin on their balance sheets will make them significantly less attractive to value investors.”
He added that since bitcoin has no intrinsic value, it is anathema to the instincts of value investors.
Cash Is Trash?
Of course, aside from valuation issues, an investor must consider the opportunity cost.
“Lost in all of the discussions about potential investment gains and losses and the utility of bitcoin (and other digital assets) is the fact that owning cash on the balance sheet is actually quite onerous,” explained Jeff Dorman, Chief Investment Officer at Arca, a digital asset investment firm. “Any company with a huge cash war chest is inefficiently using that capital, and is certainly primed for activism.”
Dorman noted that while the coronavirus may have offered a lesson that having a cash cushion is a wise move, sitting idly atop too large a cash pile is not likely to please shareholders, either, especially as it loses value to increasing inflation.
“Sure it’s risky -- but every business must confront risk on a daily basis…because if they calculate risk well, they see returns,” said Erik Voorhees, CEO of crypto platform ShapeShift. “The real risk is when companies fail to adapt and see changing trends.”
He surmised that what might seem undue risk at present could prove to be prescient if bitcoin continues its track record of eye-popping returns.
Not All Bitcoin Purchases Are the Same
However, even those bullish on bitcoin are careful to add that one should not necessarily be immediately bullish on any given company’s bitcoin purchase.
“I genuinely believe Elon Musk and Jack Dorsey are looking at bitcoin as a store of value, a hedge against inflation due to all the currency that’s been printed recently, and they understand the space well,” said Dan Ushman, CEO of market analysis provider Trendspider. “But I think it gets shady elsewhere, in companies like Phunware.”
Phunware (PHUN) - Get Phunware, Inc. Report, a Texas-based software company, became notable for its announcement on April 6 of an initial purchase of 25.8 bitcoin at an average price of $58,133 per bitcoin. The approximately $1.5 million purchase helped the stock spike over 30% when it was announced, but required the use of nearly half of the company’s cash holdings as of its March 31 10-K filing. The company also noted in the filing that it has a history of losses and expects to continue to incur losses in the future, making the purchase all the more dubious.
Ushman was quick to note the issue is not limited to just Phunware, but that that was merely a high-profile example. He likened the second strata of bitcoin-investing companies to 2017’s spate of companies chasing bitcoin and blockchain gains, most notably in Long Island Iced Tea renaming itself Long Blockchain Corp.
“When Elon Musk invests in crypto I think he looks at it as an investment and maybe even more so as insurance against inflation,” Ushman said. “When you see a small company with only a few million in revenue make an announcement about bitcoin that is unrelated to their business, that’s a red flag to me.”