Technological Evolution, Macroeconomic Uncertainty, and Accounting Standards
Publicly traded companies holding part of their reserves in bitcoin to protect their purchasing power.
What was a fantasy a few years ago is becoming a reality.
Two huge news stories have come in the past few months.
MicroStrategy Taking the Lead
It all began with MicroStrategy Inc. (MSTR), a Nasdaq-listed company, announcing that it had acquired 21,454 BTC on August 11, 2020 at an acquisition cost of $250 million.
CEO Michael Saylor explained the reasoning behind the bitcoin acquisition:
“MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively. Those macro factors include, among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, and global political and economic uncertainty. We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.”
They also describe the potential of Bitcoin as an investment vehicle as follows:
“In considering various asset classes for potential investment, MicroStrategy observed distinctive properties of Bitcoin that led it to believe investing in the cryptocurrency would provide not only a reasonable hedge against inflation, but also the prospect of earning a higher return than other investments.”
MicroStrategy also announced on September 14, 2020, that it had acquired an additional 16,796 BTC at a cost of $175 million.
As a result, MicroStrategy will record 38,250 BTC on its balance sheet (BS) at an acquisition cost of $425 million.
MicroStrategy’s market capitalization was $1.616 billion as of October 12, 2020, so its bitcoin holding represents 26% of its total market cap.
Also, according to the Company’s 10Q as of June 30, 2020 (quarterly report), the Company’s cash and cash equivalents balance was $530 million, so one can assume that a significant portion of that was used to acquire the bitcoin.
Square Following MicroStrategy’s Lead
News of Nasdaq-listed MicroStrategy’s acquisition of a substantial amount of bitcoin came as a huge surprise.
But it didn’t end as just a one-off case.
On October 7, 2020, NYSE-listed Square, Inc. announced that it had acquired 4,709 BTC at a cost of $0.5 billion.
Square is a FinTech company founded by the CEO and founder of Twitter, Jack Dorsey.
Square has been contributing for several years to the development and education of bitcoin.
The Company’s app, Cash App, allows users to easily purchase bitcoin.
It is also well known that Jack Dorsey’s (@jack) Twitter profile only says #bitcoin.
While the number of bitcoin Square acquired doesn’t match that of MicroStrategy’s, it’s significant that Square, which is one of the most influential and innovative companies in the world, has bitcoin on its balance sheet.
Square explained the reason for the bitcoin acquisition as follows:
“Given the rapid evolution of cryptocurrency and unprecedented uncertainty from a macroeconomic and currency regime perspective, we believe now is the right time for us to expand our largely USD-denominated balance sheet and make a meaningful investment in bitcoin. We view bitcoin as an instrument of global economic empowerment; it is a way for individuals around the world to participate in a global monetary system and secure their own financial future. This investment is an important step in furthering our mission.”
Why US Public Companies are Getting Into Bitcoin
MicroStrategy and Square both cite macroeconomic factors, including the uncertainty surrounding fiat currencies (like the US dollar and Japanese yen) ability to maintain their purchasing power, as reasons for their decision to acquire bitcoin.
It is easy to see how the unprecedented economic stimulus measures introduced by governments and central banks around the world, including quantitative easing and MMT based policies (i.e. Universal Basic Income, helicopter money, etc.), could lead to a debasement of fiat currencies.
The reasons for choosing bitcoin as a means of defending corporate assets against the loss of purchasing power include the Bitcoin network’s security, the network effect of being the longest existing cryptocurrency, the decentralized nature of the currency, and the scarcity of bitcoin, with only 21,000,000 BTC being generated eternally.
We expect to see a gradual increase in the number of companies like MicroStrategy and Square that will consider bitcoin as a means of asset protection in the US.
On the other hand, we don’t think there will be a similar increase in Japan.
One reason for this is the difference in accounting standards.
Crypto Accounting Standards, Major Differences Between the US and Japan
In Japan, the Accounting Standards Board of Japan (ASBJ) released “Practical Solution on the Accounting for Virtual Currencies under the Payment Services Act” in March 2018, and Japanese companies will refer to this when accounting for cryptos.
In the US, the American Institute of Certified Public Accountants (AICPA) released “Accounting for and Auditing of Digital Assets” in December 2019 (content added in October 2020).
Though the guidance is nonauthoritative, because it was released by the AICPA, it will be referenced when considering the accounting treatment of digital assets under US GAAP (US Generally Accepted Accounting Principles).
As we’ve mentioned in a past article, the main difference between the two is around the treatment of unrealized gains.
Under Japanese accounting standards, bitcoin is generally marked to market at the end of the period and unrealized gains and losses are recorded in the statement of income (PL) as current period earnings.
Under U.S. GAAP, bitcoin is essentially accounted for as an indefinite-lived intangible asset and is not subject to mark-to-market accounting.
Although bitcoin’s volatility is decreasing each year, it remains a volatile asset.
For a listed company that must regularly provide information to investors, such as earnings forecasts, the impact on the PL from holding a volatile asset such as bitcoin is undesirable.
Furthermore, in Japan, unrealized profits from cryptocurrencies are taxable income for tax purposes.
From a tax perspective, companies will find it difficult to hold bitcoin in most cases.
On the other hand, under US accounting rules, as mentioned above, bitcoin is not marked to market when the price of bitcoin increases.
The asset balance won’t be inflated, so asset efficiency metrics won’t deteriorate, and the PL won’t be affected either.
From an accounting point of view, there are less hurdles to holding bitcoin than in Japan.
(FYI: In a downward price trend, the book value of bitcoin will be written down under US standards)
Square has open-sourced information about its bitcoin acquisition that companies that are considering acquiring bitcoin in the future can refer to.
In addition to the story behind the acquisition of bitcoin and how it was acquired, there is also information regarding the accounting treatment considerations.
This is a must read for those that are interested in the accounting treatment of cryptocurrencies.
The Race to Acquire Bitcoin is On - What are Other Companies Doing?
MicroStrategy and Square aren’t the only public companies holding bitcoin.
According to https://bitcointreasuries.org , as of October 13, 2020, there were 15 companies (including funds) identified.
According to the information on the site, these 15 companies hold a total of 601,479 BTC.
That’s 2.86% of all bitcoin that will ever exist.
It will be very interesting to see how this table evolves in the future and whether more listed companies will adopt bitcoin as a means of asset preservation.