As the country heads toward its Independence Day celebration this week, the Q2 earnings season, which follows shortly thereafter, stands to provide a fireworks show of its own. Though the main event will likely exhibit an explosion of inflation-induced deterioration of operating profit for a wide swath of S&P 500 companies, there’s likely to be an interlude or two featuring some non-macroeconomic contributing factors which will spark some conversations of their own.
Astutely pointed out by (in my opinion) one of the sharpest contrarian investors I follow, hedge fund manager Doug Kass of Seabreeze Partners, cryptocurrency, in particular Bitcoin, may blow-up the P&Ls of a handful of companies who in the past 18 months have added the asset to their balance sheets.
The most high profile company to have taken this action is Tesla, which in 2021 purchased roughly $1.5 Billion. But, lesser in scale, and greater in relevance here, is another 2021 Q1 purchase by fintech and payments company Square, this occurring at a time when Bitcoin was trading at around $48k.
U.S. accounting trade organizations have issued “guidance” for companies who purchase and hold Bitcoin on their books. The guidance says that Bitcoin and other cryptocurrencies should be accounted for as intangible assets. As such, if the market value falls below the purchase price, the depreciation in value needs to be written down on the balance sheet. And from there, the write-down flows to the P&L where it’s recorded as an impairment, dinging bottom-line.
So, as we head into the July-August earnings season, shareholders of companies holding cryptocurrency should be aware of this Bitcoin-specific issue as there’s a good chance, given this year’s substantial depreciation of the asset, that it could affect the bottom line of their holdings. And for Square, which is not just looking at an impairment, but also a decline in revenue due to a slow-down in crypto-trading activity in general, downside risk to this next quarter’s report may be greater than expected.