Estimate of Tesla’s Bitcoin Holding and Analysis of 1Q2021 Bitcoin Sale

AA Uses Only the Most Accurate Equipment
for His Estimates

I thought I’d throw my chapeau into the ring of those analyzing Tesla’s Bitcoin Holdings.

And then for good measure provide my own analysis of the 1Q sale.

Summary

• Numbers of BTC and original costs are estimates.

• Tesla originally purchased BTC 46,561.73 at an average original cost of US$ 32,215.30 per “coin”. (My Scenario #2).

• Using averages of my Scenario #1 and #2, in March it sold 4,466.64 BTC at an average price of US$ 60,895.95 per coin.

• As of 31 March Tesla held BTC 42,901.81 at an average cost of US$ 31,621.36 per coin.

• Under US accounting “rules” once Tesla takes an “impairment” on its BTC holdings, it cannot reverse it if fair value increases later. The only way to “capture” the increase is to sell BTC in which case the higher fair value over carrying cost is a component of net profit.

• Because of these accounting “wrinkles”

  • Tesla may have an economic incentive to support BTC’s price because impairments flow through the income statement.

  • Or to sell BTC to generate a profit to offset impairment charges.

Introductory Comments

Don’t be followed by the apparent precision in my numbers below.

There isn’t sufficient information to achieve precision.

So my numbers and those of others cited below can only be rough estimates.

You’ll find those other estimates here and you can compare methodology and results.

First up is Shawn Tully at Fortune: 38,300 BTC held at 31 March 2021.

Second is Chuck Jones at Forbes: 42,902 BTC held.

I’ll be using Tesla’s 1Q2021 10Q as the source document for data.

If you’re interested in the US accounting treatment for digital assets, here’s a link to an AICPA publication on ASC-350.

What are Tesla’s BTC Holdings as of 31 March 2021?

From Note 3 in Tesla’s 10Q the fair market value of their BTC as of 31 March 2021 is some US$ 2.48 billion.

Using Yahoo Finance data, the closing price of BTC on 31 March was US$ 58,918.83.

That equals BTC 42,901.81. US$2.48 billion divided by US$ 58,918.83.

That number is in agreement with Chuck Jones’ calculation.

Shawn’s number differs because he’s using a profit of US$ 101 million on the March BTC sale, due to his including the US$ 27 million impairment as a component of the sales proceeds. Therefore, his cost of sale is US$ 171 million not US$ 144 million.

By my calculation the carrying value of Tesla’s BTC portfolio is US$ 31,621.36 as of 31 March 2021. US$1.331 billion divided by 42,091.81 coins.

But that is an adjusted cost after the US$ 27 million impairment. (Also disclosed in Note 3).

First cut.

To determine the original purchase price of the remaining BTC we have to add back the US$ 27 million impairment charge. That means the original cost of the Bitcoin remaining after the March 2021 sale but before impairment is actually US$ 1.358 billion.

Note the implicit assumption that the impairment was taken after the March sale.

On this basis the historic cost per Bitcoin is US$ 32, 262.81.

But another wrinkle.

As Shawn Tully points out, reconciling the balance of the BTC holdings results in a US$ 2 million difference.

That is, Tesla purchased US$ 1.5 billion sometime between 1 January 2021 and early February. The last purchase would have had to occurred some time prior to 8 February.

Why?

Tesla first announced the purchase in its 2020 10-K which is dated 8 February.

As per note #3 in Tesla’s 10Q Tesla recognized gains of US$ 128 million on the BTC sale and took a US$ 27 million impairment.

As per my understanding of the required accounting, the impairment is unrelated to the sale.

From the Consolidated Statement of Cash Flows, we see that Tesla received proceeds of US$ 272 million from the BTC sale. If the recognized gain on the sale was US$ 128 million, then the cost of the BTC must be US$ 144 million.

(Note that is 9.6% of the original purchase amount and would seem confirm Tesla’s 1Q statements that it sold 10% of its original holding)

US$ 144 million plus US$ 27 million equals an expected US$ 171 million decrease in the balance of BTC from first purchase through 31 March 2021

But that amount is US$ 2 million more than the net change in BTC holdings—US$ 169 million.

Is this due to rounding? Or to vehicle purchases using BTC? Or a combination of both?

We don’t know.  Sadly, a question that might have shed light on this issue was not selected for the Q&A on Tesla's 1Q Call.

We also don’t know what the US$ 27 million impairment charge relates to.

Is it the original BTC purchase? Or BTC received for car purchases? Or both? Or something else?

Scenario #1

If we assume there were no material car purchases with BTC and use the US$ 1.358 billion figure above, the original historic purchase cost per “coin” is US$ 32,262.81.

Tesla would have had to sell 4,463.34 BTC to equal the US$ 144 million cost of BTC sold in March.

The original number of BTC bought would then be 46,555.15

You’ll notice this equals US$ 1.502 billion at the estimated historic cost above. Thus it includes the unexplained US$ 2 million “difference”

Scenario #2

Same assumptions as Scenario #1, but US$ 2 million assumed rounding differences is excluded. The original cost of the BTC purchase is US$ 1.356 billion. That gives an original purchase cost of US$ 32,215.30 per “coin”.

In this case Tesla sold some 4,469.93 BTC.

Under this second scenario, it would have originally bought 46,561.73 BTC

Key Accounting Considerations

Under ASC-350 and ASC-820, once fair value is lower than carrying value, Tesla must make a one way adjustment in carrying value via an impairment charge.

If fair value later increases, the impairment can not be reversed. (Question #6 pages 6-7 in the AICPA publication linked above)

However, on sale of BTC in the future, the difference between carrying value (reflecting any impairments) and sale proceeds will be recognized as “profit”. 

Thus, if fair market value has increased but not carrying cost, Tesla would recapture the difference between FMV and carrying cost in additional profit on the sale.

Implications of Accounting Rules

It would be interesting to see if Tesla or any of its senior officers announce BTC initiatives or tout BTC when the price of BTC appears in “danger” of declining below the carrying value in Tesla’s financials: US$ 31,621.36 as of 31 March 2021.

It will also be interesting to see if Tesla conducts any additional sales to offset any future impairments.

March 2021 BTC Sale

The Scenario #1 and Scenario #2 estimates for the number of BTC sold are very close. So let’s use the arithmetic average of both. That’s 4,466.64.

Using this number, the average price received on the March sale was roughly US$ 60,895.95. US$ 272 million divided by 4,466.64.

If you look at the Yahoo Finance historic prices for BTC, you’ll see several days that might be candidates for a sale, e.g. March 14^th.

 

Tesla, Its Techno-king, and Bitcoin

But Before You Do
Make Sure They Really Are An Expert

You will probably have seen by now that Tesla’s “Techno-king” announced that Tesla would not accept Bitcoin to purchase its cars.

It was, as I envision it, an almost a Biblical moment – a modern Saul on the road to Tarsus struck by the realization that Bitcoin was very energy intensive and thus not good for the climate.

This scenario does raise one question in my mind.

Tesla’s Technoking is a widely acknowledged genius.

Whether he is smarter than Bill Gates is I understand a matter of serious and furious debate in many quarters.

Given that, I am perplexed as to how this simple fact eluded him?

Saul’s conversion was occasioned we are told by a blinding light and the voice of Jesus.

Pretty darn hard to ignore.

Perhaps, Tesla’s Techo-king had a similar experience.  

The blinding light an exploding battery? 

The voice that of Bill Gates? In which case the debate referred to above may have been conclusively resolved.

Some but certainly not I might suspect that Mr. Musk has been having a bit of fun with the gullible out there.

Talking up Dogecoin one day, driving up the price.

Then calling it a "hustle", and driving down the price on another day.

The same with Bitcoin.

Hard to tell, but I doubt it.

What we can do is look at Tesla’s conditions for the use of Bitcoin for the purchase ot its vehicles for greater insight into its core beliefs.

Veritas may often be in vino.

But it is demonstrated more often and concretely in matters financial.

The T&C were posted on Tesla’s website, but have been removed.

Presumably, in line with the most recent decision on Bitcoin.

We can turn to electrek for what they claim are the original T&C.

Here’s the “bit” about refunds.

I’ve highlighted the pertinent text in red.

If you are entitled to a refund of your payment or to a buyback, we reserve the right to refund to you either the exact Bitcoin Price that you provided to us at the time of purchase or an amount of US Dollars that is equivalent to the US Dollar price of the product that you purchased, at our sole and absolute discretion, taking into consideration operational efficiency. The same applies to all fees and incidental costs to which you are entitled. THE PRICE OF BITCOIN CAN BE VOLATILE AND THE VALUE OF BITCOIN RELATIVE TO US DOLLARS MAY DECREASE OR INCREASE BETWEEN THE TIME THAT YOU MAKE YOUR PURCHASE AND THE TIME THAT WE PROVIDE A REFUND OR BUYBACK. IF WE REFUND YOU IN BITCOIN, THE VALUE OF SUCH AMOUNT OF BITCOIN RELATIVE TO US DOLLARS MIGHT BE SIGNIFICANTLY LESS THAN THE VALUE OF SUCH AMOUNT OF BITCOIN RELATIVE TO US DOLLARS AT THE TIME OF YOUR PURCHASE. IF WE REFUND YOU IN US DOLLARS, THE US DOLLAR AMOUNT THAT WE PROVIDE TO YOU AS A REFUND MIGHT BE SIGNIFICANTLY LESS THAN THE CURRENT US DOLLAR MARKET VALUE OF THE AMOUNT OF BITCOIN IN WHICH YOU MADE YOUR PAYMENT. YOU ASSUME THE RISK OF BITCOIN PRICE. DEPRECIATION AND APPRECIATION AND WILL HAVE NO RIGHT TO SELECT THE METHOD OF REFUND. YOU ARE NOT ENTITLED TO RECEIVE ANY APPRECIATION ON THE VALUE OF THE BITCOIN THAT YOU PROVIDED TO US AS PAYMENT IN CONNECTION WITH A REFUND OR BUYBACK.

Clearly, despite its once stated belief in Bitcoin—which we can presume was or should have been operative at the time the above was written--, Tesla was unwilling to accept a potential decline in the US dollar value of Bitcoin. But was glad to accept an increase in its value.

If Bitcoin is the righteous alternative to evil fiat currencies, then why would one measure one’s profit or loss in such (fiat) currencies?

And more importantly seek to retain that fiat currency profit?

Hard to square that circle, except perhaps to note that there are many "hustles" and "hustlers" out there.

But then I am neither a Master of Coin nor a Techoking.

That being said, it’s not untypical for an investor in debt or equity to look to keep the upside and shift off the downside to some “sucker”. 

Market Commentary: Tesla "Loses" One-Third of Its Value

 

Make Sure Your Weighing Machine is Properly Calibrated

Just a few days ago, I read courtesy of Reuters that Tesla had lost one-third of its value. 

Shocked, I rushed to read how such a loss had occurred.

Had Brother Musk misplaced or “lost” the “code” to Tesla’s Bitcoin account?

Did meteors strike Tesla’s factories, wiping out needed capital assets?

Did Lucid leapfrog Tesla's self-driving technology?

I read on.

Rather the article was about the decline in the price of Tesla stock.

The writer of the headline apparently is a naive adherent of the efficient market theory conflating stock prices with value.

So what is the point?

There is a difference between the price of a stock and its (intrinsic) value.

Many tragedies in the investment world have occurred because of a conflation of the two.

Market sentiment plays a large part in the price of a stock.

One day an NMC or a Wirecard are flying high. The next day they are not.

When 911 occurred, prices on the NYSE dropped dramatically forcing the closure of the market.

In both cases there was a wide gap between value (reality) and price (sentiment).

Prior to the price decline NMC and Wirecard had high prices, but no value, unless one were to count negative numbers.

In the second case, the stocks on the NYSE as a general group did not suffer any real loss of value. Their prices just diverged from value.

Earlier this year, one of my colleagues gave me a JPMorgan research piece on Tesla which posited a value of some USD 160 or so a share.

JPM had computed the value using multiple “different” methods, though as Aswath might tell you many of these seemingly independent methods are really fundamentally linked.

I found it entertaining but not convincing reading. The JPM research piece not the Professor's. 

A sum of the parts analysis in a distressed sale might have been more illuminating.

Manifest Signs of Irrational Exuberance in the Market

In December, Martin Wolf—for whom I have a lot of respect—wrote an article in the FT arguing that the stock market is not currently overvalued.

To be as fair, I’d note that his argument was based on two premises: corporate earnings would be strong and interest rates would remain ultra-low.

With the right assumptions, of course, just about any assertion can be supported.

I’d like to make a contrary case that financial markets—not just that for equities—are indeed in bubble territory.

Bubbles occur when providers of capital—lenders or investors—underestimate risk and overestimate return.

It’s relatively simple to diagnose contrary to what some “maestros” believe as I now propose to show.

Think of me as your financial Don Ho, but with a focus on larger events.

The size of the bubble is directly proportional to 

1. the acceptance of most outrageous investment theses and valuations and 
2. engagement in unsafe and unsound practices. 

For the last point, the “running with scissors” test is an apt tool.

First, signs in the equity market.

What better poster child for irrational exuberance in the equity markets than Tesla?

One does not have to be as smart as Jim Chanos to see that Tesla’s price is supported by multiple fanciful delusions about the future. “Fanciful” to distinguish these delusions from “normal” investor over optimism.

And Tesla is not the only case, but likely the most outrageous.

To measure the extent of the madness reflect on Tesla’s entry to the S&P 500.

That indicates the extent of the overvaluation of Tesla. 

It also thus suggests we have passed the frontier of “irrational exuberance” to “Brexit” level delusions.

Second, signs in the debt markets. 

Issuers with currently crippled businesses are issuing debt at record levels.

Now I am not advocating refusing loans to all companies in distress. But rather being selective.

And when doing so applying time tested practices.

One should wear a helmet when riding a motorcycle and drive at a sensible speed.

When the road is wet, it’s daylight madness not to wear a helmet and not to drive slower.

But exactly the opposite is happening.

Much of this debt is “secured” by assets that the borrowers currently cannot profitably employ.

There is also a surfeit of such unemployed assets at present.

Additionally, it is unclear what returns these assets may afford in the future. Or when that “future” may be.

The collateral value of an asset that has limited value in use is roughly equivalent to the sound of one hand clapping.

Think of planes and cruise ships.

To that add the wanton abandonment by “investors” of basic common sense credit and legal structuring.

Debt is repaid by cashflow not assets. History suggests that primary reliance on collateral for repayment is likely to be an unhappy affair.

Covenant “lite” structures offer limited legal protection and limited means to pressurize debtors. And will be of limited utility when clouds gather.

Third, signs in private equity. 

Also in December Kate Wiggins wrote an article on how canny private equity General Partners had found a solution to blocked “exits”. 

If there’s no suitable opportunity for a trade sale or an IPO, why not sell a portfolio company to yourself? Or more precisely to a so-called continuation fund.

A suitable “opportunity” is one where one doesn’t have to sell at a loss. Or face the subsequent valuation consequences of failure to sell a duff asset that there was no perceptible demand for.

But sales essentially to oneself can be “structured” to

1. deliver sufficient “return” to LPs to keep them happy
2. generate carried interest for the “deserving” GP, and
3. create the appearance of a suitable return on the selling Fund that will persuade a “sophisticated” investor to sign up for the buying Fund (the continuation fund).

One hopes that LPs from the selling fund are not the major cohort in the buying fund.

But then AA has seen some rather incredible behaviour by so-called sophisticated investors.

Fourth, signs in the retail market. 

Increased activity by the financially illiterate: the rise in the price of Bitcoin, day trading, etc. 

The past suggests that all this is not going to lead to a happy outcome. Though as you know past performance is no guarantee of future results.

Tesla Phenomenal 4Q 2019 Earnings - Built on Government Handouts

Sadly Tomorrow Never Comes

Tesla announced 4Q19 net income of USD 105 million.

Accompanying the announcement, Elon Musk said:

A lot of retail investors have deeper and more accurate insights than many of the big institutional investors

He went on to predict great things for Tesla’s future. A claim he’s made before.

In that respect Tesla is like Brazil - its bright future always remains in the future. Or the bar portrayed above.

Some 9 years after its IPO, Tesla still has to turn an annual profit. 

Excitement over the 4Q19 announcement should be tempered by realisation that Tesla has not yet had a significant profit from its basic lines of business.

An important point for investors to consider unless harvesting government handouts is the key business of Tesla. 

In 4Q19 Tesla’s revenues included some USD 133 million from sale of regulatory credits. So Tesla’s basic businesses earned a negative USD 28 million in the Quarter. 

That "performance" is not as good as 3Q19 where the reported net income of USD 143 million included regulatory credits of only USD 134 million. In that Quarter Tesla’s basic businesses earned a whopping USD 9 million.  And you thought Saudi investment banking fees were huge.

For 2019 reported net income was a loss of USD 862. Total regulatory credit sales were USD 596 million.

So the net income from basic businesses was a USD 1,450 million loss. 

With performance like that AA can’t understand why the stock has hit USD 1,000 per share.

Tesla Reports 3Q2019 Net Profit – But Hold the Champagne

Perhaps not precisely every minute, but often enough to 

fulfill demand for "wise" investors

The market is abuzz with comments like “Tesla Shares Soar After Crushing Third Quarter Earnings” and “Tesla Wows Analysts with Quarterly Net Profit”.

So how excited is Abu Arqala?  Not much.

Has AA changed his view on Tesla?  No.

Why?

First, let’s look at Tesla’s 3Q2019 “performance”.

Reported GAAP net income is USD 143 million.

Sales of regulatory credits are USD 134 million.

That USD 134 million is 94% of the quarter’s net profit.   It has nothing to do with Tesla’s fundamental businesses making a profit.  Rather it is (another) gift from Uncle Sugar.  Corporate welfare.  See my earlier post.

Excluding that amount Tesla’s automobile and other businesses generated a “massive” net profit of USD 9 million in 3Q19.   AA is suitably un-wowed.

And of course there are likely to be other non-automotive regulatory credits sold, e.g., by Solar City.

On a simple proforma basis, that’s USD 36 million a year from the businesses.  An amount so large that in order to calculate it, AA had to employ both the supercomputer and electron microscope he used to calculate Saudi investment banking fees for an earlier post.  Saudi investment banking fees were much larger.

Net income for the first nine months is a loss of USD 967 million.  Excluding regulatory credit sales, the net loss is USD 1.428 billion.

AA thinks it’s interesting that regulatory credit sales were not mentioned in the breathless hype over Tesla’s “crushing” or “wowing” earnings. Are our financial journalists reading more than the press releases?  Do they understand the importance of regulatory credit sales to Tesla's business.  One (that would be AA) sure hopes so.

And a bonus link on an accounting change adopted in 2019 that makes Tesla look better on paper.

"Better" is a relative term -- as in USD 967 million in losses is "better" than USD 1.428 million.

Great Moments in Capitalism: Tesla – He Built It All by Himself or Did He?

"Daddy, read me the story about how the Power Ponies saved the Job Creators"

There are many stirring yarns of dogged entrepreneurs who by dint of their prodigious intellects, hard work, and business smarts built businesses all by themselves.  Giants of the business world.

Secular saints for our national—and dare I say international--religion:  Steve Jobs, Henry Ford, even according to some, Papa John.  Visionaries, pioneers, rugged self-reliant individuals.  The kind that disdain handouts.

According to these tales, more often than not these hardy individuals have had to struggle against the heavy “dead hand” of governments that seem more interested in crushing their visions than stepping out of the way to allow them to succeed.  Men like Hank Rearden.

In today’s installment, we look at but one slim chapter from the storied career of Elon Musk—visionary technology investor, entrepreneur, engineer, and product architect.  

An  immigrant to these shores and to Canada in more tolerant times, he’s built many businesses all by himself demonstrating, though no demonstration is really required, that a hard working smart individual can succeed on his own without government handouts.

But would you be surprised if I told you that Musk like many other of our secular saints had a silent partner who helped make his dreams reality?

An unsung hero.  One that AA will now reveal.

To set that stage some information from Tesla’s financials. They say that numbers never lie, though they rarely ascribe that virtue to all accountants.

TESLA REGULATORY CREDIT SALES (RCS)
Millions of US Dollars
Year	RCS	Net Loss	RCS/NL	NL-RCS
2009	$8	($557)	1.5%	($565)
2010	$3	($154)	1.8%	($157)
2011	$4	($254)	1.5%	($258)
2012	$41	($396)	10.2%	($437)
2013	$194	($74)	262.7%	($268)
2014	$216	($294)	73.6%	($510)
2015	$169	($889)	19.0%	($1,057)
2016	$302	($773)	39.1%	($1,075)
2017	$360	($2,241)	16.1%	($2,601)
2018	$419	($1,063)	39.4%	($1,481)
TOTAL	$1,716	($6,695)	25.6%	($8,411)

Regulatory Credit Sales are from Zero Emission Vehicle Credits (ZEV), Green House Gas (GHG), and since 2016 credits associated with Solar City.  You can read about it here on page 11 of Tesla’s 2018 Annual Report.  Data above is from that AR and earlier ARs.

Tesla has also indirectly benefited from the USD 7,500 tax rebate given purchasers of its cars by the Federal Government.  To be fair Tesla is not the only company that has benefited.  That tax rebate is not reflected above as it accrues to the purchasers not directly to Tesla.

However, without Uncle Sugar’s discount, Tesla cars would cost more and sales would be less.

Tesla has reached the 200,000 car sales milestone at which point the credit halves and then haves again this year.  Unless Tesla and other electronic vehicle manufacturers are successful in their efforts to “save the environment” by having a usually compassionate Congress extend the rebate program, an important support for sales will be lost.

At this moment prospects don’t appear good for the “Driving American Forward” Bill.  Senate Bill.  House Version.

Let’s assume that this noble effort falters.

Ignoring the reductions in 2019 in the rebate, and assuming that anyone who buys a Tesla has at least a USD 7,500 Federal tax bill, then Uncle Sugar has supported Tesla’s business to the tune of at least an additional USD 1.5 billion.  Or USD 3.2 billion in total.

Beyond that Tesla benefited from a US Government Guaranteed  USD 465 million loan under the ATVM program.  Tesla repaid the loan prior to its maturity.

Tesla also benefits from various state incentives.

There are a lot of Sugar Daddies out there for struggling corporations and the deserving rich who can afford to buy Tesla’s product.

With partners like these it’s hard to see how Tesla can fail, unless you look closely at the financials.