How do the new crypto accounting rules contribute to the increased adoption of Bitcoin by institutions before the BTC halving event?
U.S. accounting standard authorities have unanimously approved long-awaited guidelines for valuing digital assets, providing crypto companies and businesses with standardized methods for assessing the value of their cryptocurrencies such as Bitcoin and Ethereum.
This research report examines the impact of the new crypto accounting rules on Bitcoin’s institutional adoption, focusing on case studies of MicroStrategy and Tesla’s Bitcoin holdings. The report also explores the potential bullish effect on Bitcoin’s price leading up to the halving event in 2024.
Bitcoin Gains Mainstream Acceptance
The new accounting guidelines, expected to be released by the end of the year, will require companies with cryptocurrency investments to report their assets at fair value. This approach aims to reflect the most current value of the assets, 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 current practices, according to feedback received by the Financial Accounting Standards Board (FASB) over several months.
The new regulations will be implemented by 2025, although companies have the option 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, stating, “This is a significant advancement for the entire crypto sector. It’s a major 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 disclose substantial cryptocurrency holdings, any limitations on these assets, and details about the process of converting crypto assets received as payment into cash.
The new guidelines will only apply to fungible crypto assets, which can be exchanged with other similar assets. This excludes non-fungible tokens (NFTs), stablecoins, and wrapped tokens, which are not covered by these rules.
Ultimately, this development brings Bitcoin closer to mainstream adoption, as more institutions are likely to consider adding cryptocurrencies to their portfolios. The integration of crypto into accounting standards means that companies will now include crypto-related gains and losses in their quarterly financial statements.
Analyzing Tesla and MicroStrategy’s Bitcoin Holdings
The FASB’s approval provides much-needed regulatory certainty for companies with digital assets on their balance sheets, including Tesla, Coinbase Global, and MicroStrategy.
Advocates argue that this could pave the way for greater adoption of digital assets in corporate treasuries, particularly among companies that have been hesitant due to the unfavorable optics created by existing accounting standards.
As of the end of July, MicroStrategy reported Bitcoin holdings valued at over $4.5 billion, while Tesla disclosed holdings valued at $184 million by the close of the second quarter in 2023.
Mark Palmer, an analyst at Berenberg, noted that the updated guidelines should help MicroStrategy and similar firms dispel the negative perception generated by impairment losses under the previous FASB rules.
Under the current American Institute of CPAs guidelines, most cryptocurrencies are classified as intangible assets, leading to their recording at the purchase price and evaluation for value declines quarterly. Even a temporary drop in Bitcoin’s price is marked as an impairment, with no option for upward revision if the market rebounds. This accounting approach consistently impacts MicroStrategy’s earnings as the largest public company with crypto holdings.
Once the new regulations are implemented, companies holding cryptocurrencies will provide greater transparency to investors regarding the value of their digital assets. This will go beyond highlighting losses and offer a more comprehensive view, which will be particularly impactful for companies with substantial crypto holdings.
Increasing Total Value Locked (TVL) Amid Crypto Adoption
The forthcoming changes in U.S. accounting standards for cryptocurrencies will have a notable impact on the Total Value Locked (TVL) in the DeFi market. Historically, TVL has primarily measured digital assets within DeFi protocols, excluding Real-World Assets (RWA) like mortgages and private equity investments.
However, as traditional financial institutions increasingly adopt these new accounting rules, the inclusion of RWA in TVL calculations becomes relevant and essential.
Additionally, the draft’s recognition of Ethereum is expected to further boost DeFi’s TVL, strengthening its market position. With Bitcoin’s next halving event scheduled for 2024 and the new accounting rules taking effect in 2025, there is 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 at over $1 trillion, 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 focused 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 to fair value accounting, this could lead to more earnings volatility and provide a more accurate reflection of asset value.
Currently, only a small percentage of publicly listed companies worldwide hold Bitcoin. However, with the new accounting rule, more companies may be encouraged to adopt crypto assets. This offers hope for the crypto sector, which has faced regulatory challenges and a market slump that has dampened interest in the industry. The true impact on broader corporate adoption of crypto remains to be seen.