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Tesla could take a big loss on its Bitcoin bets (NASDAQ:TSLA)

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Tesla’s (NASDAQ:TSLA) big bet on Bitcoin (BTC-USD) is beginning to look like a blunder amid a violent crash for cryptocurrencies.

While adding Bitcoin (BTC-USD -14.6%) in early 2021 looked like a wise decision throughout the year and even into early 2022, the tables have turned rather quickly in recent months. The price of Bitcoin specifically has fallen just over 50% in the current quarter, which bodes poorly for Tesla’s (TSLA -7.1%) upcoming quarterly report.

With shares down nearly 50% year to date, bookended by an over 7% drop on Monday, the Bitcoin issue adds yet another headwind to contend with as a number of adverse impacts bear down on the Austin-based automaker.

Bull Market Buying

In the first quarter of 2021, the company invested $1.5B in bitcoin in a novel addition to its balance sheet.

“We believe in the long-term potential of digital assets both as an investment and also as a liquid alternative to cash,” the company said at the time.

There was a catch, however, in that digital assets are considered “indefinite-lived intangible assets under applicable accounting rules.” As such, any decrease in the fair value of the assets must be recognized as an impairment charge while an increase in their value is not reflected in the same fashion as a gain.

The exact purchase prices are unknown, but Bloomberg estimated a purchase price of about $34.7K per Bitcoin for the initial purchase. The automaker also sold about 4,800 Bitcoin for $272M in the same quarter as it offloaded some Bitcoin over $50K. Reaching a peak near $70K per coin, Tesla’s (TSLA) buying in the early 2021 bull market looked like a savvy move by a tech savvy and meme-loving CEO in Elon Musk.

Correlation, Causation, and Quarterly Impact

However, that upward trend proved transitory.

After a period of faltering, roaring inflation and added macroeconomic pressure from geopolitical events sparked major selloffs in equities. While Bitcoin has long been billed as a non-correlated asset that can work as an inflation hedge, it has actually crashed just as inflation has picked up steam. In another ironic twist, the currency that was formulated as a new way to trust transactions and verify work has been hit hard by opaque “stablecoins” and uncouth behavior by exchanges and lending platforms.

As all of these trends come to bear, Bitcoin has sold off sharply and left the remaining 38,000 Bitcoin on Tesla’s (TSLA) balance sheet underwater. Bitcoin trended near $22.7K amid a sustained selloff on Monday evening, implying about a $12K loss per coin held at Bloomberg’s price estimates. In total, that would suggest a loss of over $450M on the remaining investment. Given the majority of Bitcoin’s decline from its prior heights occurred since April 1, much of that loss is likely to be recognized in Tesla’s quarterly report scheduled for late July.

Of course, unlike other companies holding significant amounts of Bitcoin on their balance sheet like Microstrategy, Bitcoin is a sort of sideshow for Tesla. As a growing auto manufacturer, vehicle deliveries and margins on those autos are clearly the important metrics to monitor.

However, this may too be challenged as the company’s key growth market in China comes under severe supply chain pressure. Per a leaked e-mail from Elon Musk, Q2 was a “very tough quarter” due to constraints in the country and a late-June production push is needed to spruce up the difficult quarter.

In the end, the Bitcoin issue adds yet another headache to a quarterly report that is likely to be incredibly noisy with Elon Musk’s proposed purchase of Twitter, a stock split, China lockdowns, sexual harassment allegations against the CEO, autopilot issues, and more adding to an already challenging quarter for automakers.

Read more on the earnings expectations for Tesla’s second quarter.

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