On Wednesday, U.S. accounting standard authorities unanimously approved long-anticipated guidelines for valuing digital assets. These new rules will provide crypto companies and other businesses with substantial digital currency holdings a standardized method for assessing the value of their Bitcoin, Ethereum, and other cryptocurrencies.
This research report aims to explore the impact of new crypto accounting rules on Bitcoin’s institutional adoption, focusing on case studies of MicroStrategy and Tesla’s Bitcoin holdings. The study also dives into the potential bullish impact on Bitcoin’s price ahead of the halving event in 2024.
Bitcoin Gets Mainstream Adoption
New accounting guidelines, set to be released by the end of the year, will mandate companies with cryptocurrency investments to report their assets at fair value. This approach aims to reflect the most current asset value, including any recoveries after price declines. While this new standard is expected to introduce volatility into the earnings reports of crypto-heavy companies, it is seen as an improvement over existing practices, according to feedback given to the Financial Accounting Standards Board (FASB) over several months.
The new regulations are set to be implemented by 2025, although companies can choose to adopt them earlier, as agreed upon by the FASB.
Jeff Rundlet, the head of accounting strategy at Cryptio, a software firm specializing in accounting, praised the move. He said,
“This is a significant advancement for the entire crypto sector. It’s a big step towards broader acceptance. Finalizing these guidelines could encourage large corporations, who may be hesitant to include crypto in their balance sheets due to its technical complexities, to reconsider.”
Companies will also be required to reveal substantial cryptocurrency holdings, any limitations on these assets, and details about the conversion process for crypto assets received as payment and immediately turned into cash.
The new guidelines will only apply to fungible crypto assets, meaning they can be exchanged with other similar assets. This excludes non-fungible tokens (NFTs) as well as stablecoins and wrapped tokens, which are not covered by these rules.
Ultimately, the good news is that Bitcoin is inching closer to mainstream adoption, as an increasing number of institutions are likely to consider adding cryptocurrencies to their portfolios. The integration of crypto into accounting standards will also mean that companies will now include crypto-related gains and losses in their quarterly financial statements.
Analyzing Tesla And MicroStrategy’s Bitcoin Sentiment
Nonetheless, the FASB’s approval provides much-needed regulatory certainty for companies with digital assets on their balance sheets, including electric car manufacturer Tesla (TSLA), brokerage firm Coinbase Global (COIN), and software company MicroStrategy (MSTR).
Advocates also argue that this could pave the way for greater adoption of digital assets in corporate treasuries, especially among companies that have been hesitant due to the unfavorable optics created by existing accounting standards.
As of the end of July, MicroStrategy reported that it had amassed Bitcoin holdings valued at over $4.5 billion. Meanwhile, Tesla disclosed that it had reduced the value of its digital assets to $184 million by the close of the second quarter in 2023.
Mark Palmer, an analyst at Berenberg, noted that the updated guidelines should assist MicroStrategy and similar firms in dispelling the negative perception generated by impairment losses, which were a consequence of the previous FASB rules.
Under current American Institute of CPAs guidelines, most cryptocurrencies are classified as intangible assets, like trademarks or copyrights, which are seldom traded. This forces companies to record crypto at the purchase price and evaluate for value declines quarterly. Even a brief Bitcoin price drop is marked as an impairment, with no option for upward revision if the market rebounds. This accounting approach consistently impacts MicroStrategy’s earnings, the largest public company with crypto holdings.
For example, if a company buys Bitcoin at a fair value of $500,000 and it depreciates by $100,000, that loss must be acknowledged and the value of the company’s crypto holdings must be adjusted downward.
Even if the asset’s fair value later rises to $600,000, the impairment loss remains fixed and cannot be revised upward on the balance sheet. According to GAAP, the asset’s value would stay at the impaired level of $400,000 in this case.
Once the new regulations are implemented, companies holding cryptocurrencies will offer greater transparency to investors regarding the value of their digital assets. This will move beyond just highlighting losses, providing a more comprehensive view. The change will be particularly impactful for those few companies with substantial crypto holdings.
Increasing TVL Amid A Surge In Crypto Adoption
In light of the forthcoming changes in U.S. accounting standards for cryptocurrencies, there will be a notable impact on the Total Value Locked (TVL) in the DeFi market. Historically, Real-World Assets (RWA) like mortgages and private equity investments have not been represented on-chain, making TVL a measure primarily of digital assets within DeFi protocols.
However, as traditional financial institutions are increasingly adopting these new accounting rules, the inclusion of RWA in TVL calculations becomes both relevant and essential.
Additionally, the draft’s acknowledgment of Ethereum is poised to further boost DeFi’s TVL, strengthening its market position. With Bitcoin’s next halving event slated for 2024 and the new accounting rules set to take effect in 2025, there’s potential for a surge in Bitcoin’s market capitalization. These accounting changes are likely to strengthen the position of major mining companies, further accelerating Bitcoin’s market dominance.
Conclusion
The crypto asset class, valued above $1 trillion, may be the smallest but has outperformed all others this year. Its correlation with tech stocks has declined, and its volatility is now lower than that of gold. The immediate investment outlook is centered on the anticipated approval of the first Bitcoin spot ETFs, emerging regulatory clarity, and the upcoming Bitcoin ‘halving’ in April.
With the Financial Accounting Standards Board (FASB) simplifying crypto ownership for companies by transitioning from historical cost accounting to fair value accounting, this could lead to more earnings volatility, and offer a more accurate reflection of asset value.
Currently, only about 55 out of approximately 50,000 publicly listed companies worldwide hold Bitcoin, accounting for 1% of its total supply. Leading this trend are companies like MicroStrategy, Marathon Digital, and Tesla.
This accounting rule offers hope for the crypto sector, which has been struggling with a challenging regulatory environment in the U.S. and a market slump that has dampened interest in the industry. Whether this will serve as a genuine catalyst for broader corporate adoption of crypto remains to be seen.
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