New Accounting Rules Create Billions In Profits For Bitcoin Treasury Companies
To investors,
Public companies are held to a higher standard of transparency and disclosure. The idea is to ensure investors are operating with as much information as possible. This has led to strict accounting practices and a regulatory apparatus ensuring companies are using similar definitions and calculations.
The problem with such a rigid approach is that edge cases are unaccounted for. A good example is bitcoin on the balance sheet of a public company. Until recently, a company would have to hold the bitcoin at their investment cost or at the lowest price bitcoin reached during a set time period.
In layman terms, public companies had bitcoin on their balance sheet that was worth much more than they were allowed to say it was worth.
This is obviously madness. Bitcoin is a highly liquid asset that trades 24/7/365. You can see how many bitcoin a company holds and then multiply it by the price of bitcoin at any minute, so these accounting rules have not made sense for this specific asset.
But bitcoin is considered property. And property is usually illiquid. The accounting rules make sense for 99% of the use cases — bitcoin is the exception, not the rule. As I said, this is a great example of where well-intentioned rules serve their purpose almost all the time, yet the one time they miss it seems crazy.
Thankfully, the Financial Accounting Standards Board (FASB) decided to change the accounting treatment for crypto assets. Companies can now market their assets to the market price. The rule change has begun to go into effect and we are seeing the first companies report under the new guidance.
Tesla, who bought bitcoin back in 2021, reported their earnings this week. They showed a $600 million gain in net income thanks to the new accounting rules.
This type of positive impact to a public company balance sheet will catch the attention of many CFOs. They are now afforded a new tool that was previously unavailable to them.
It is not hard to see a world where companies continue to put bitcoin on their balance sheet. Some companies will be organizations with no future. But plenty of companies that are strong operating businesses will incorporate bitcoin into their treasury strategy as well.
I am most interested in the companies that can use bitcoin as a tool to further their mission of serving customers and creating economic value. If putting bitcoin on the balance sheet of a failing company is good, putting bitcoin on the balance sheet of an attractive company is great.
The issue that people need to navigate is that public markets like clean stories. Rather than position an attractive business as an organization run by luddites, company leadership will have to be measured in their description of what they are doing — protecting shareholder capital with the only asset that continues to serve as the true benchmark return.
And now that FASB is empowering executives to report the true value of their bitcoin, I expect many more companies to jump on the bitcoin train. This will provide continued persistent demand for the digital currency. The price will grind upwards and financial markets will never be the same.
Hope you all have a great end to your week. I’ll talk to everyone on Monday.
- Anthony Pompliano
Founder & CEO, Professional Capital Management
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Will Clemente is the co-founder of Reflexivity Research.
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