Accounting Rules Lag Crypto Market

Regulators Slow to the Draw on Cryptocurrencies

These days, it seems every man and his dog are trading cryptocurrencies, yet more than a decade since bitcoin’s launch, accounting rules have failed to catch up to the realities of the crypto market. The Financial Accounting Standards Board, the entity tasked with setting accounting rules, has not issued guidance on how to account for cryptocurrencies. Neither is there anything about cryptocurrency on its agenda. A search for bitcoin and crypto on the FASB’s website turned up a couple mentions from 2018, but nothing since. This almost seems like dereliction of duty. Companies have made do by fitting their cryptocurrency holdings into the existing regulatory framework.


The Securities and Exchange Commission is also behind in its efforts to legislate the crypto market. It has ruled that the two largest cryptos – Bitcoin and Ethereum – are not securities requiring SEC registration, but is locked in a legal battle with the company behind XRP, a top ten cryptocurrency by market capitalization, about whether XRP is a security which must be registered with the SEC. This after years of wrangling with the company over XRP’s classification.


Attempts to get the SEC’s blessings for ETFs available to everyday investors have failed, while investment vehicles with certain restrictions – such as availability only to accredited investors – have been around for several years. One such vehicle is the Grayscale Bitcoin Trust, a publicly traded investment trust that tracks the price of bitcoin. Investors frustrated with the regulator’s tardiness have turned to trading on unregulated crypto exchanges, a risky endeavor sometimes resulting in huge losses to hackers and other unscrupulous characters.


How Are Companies Accounting for Cryptocurrencies?

As cryptocurrencies gain mainstream adoption and more companies buy bitcoin and other cryptocurrencies, the need for accounting rules aligned with the attributes of cryptocurrencies becomes vital. To understand how companies are accounting for cryptocurrencies, we looked at how Microstrategy (NASDAQ: MSTR), one of the largest public company holders of bitcoin, accounted for its holdings.


Microstrategy classifies its bitcoins as intangible assets and carries them at cost on its balance sheet, consistent with the rules for recording intangible assets. A decline in bitcoin’s price triggers an impairment loss, but probably surprising to non-accountants, an increase in price does not trigger any gains. Under the rules governing intangible assets, gains are not recorded for increases in the values of intangible assets, while impairment losses may be recorded for declines in value. If Microstrategy’s bitcoin triggers an impairment loss and bitcoin’s price subsequently recovers, the loss cannot be reversed. It is a one-way street. The only time it can record a gain is if it sells the bitcoins higher than a price at which it bought them. As such, the company’s earnings got no benefit from the recent run up in the price of bitcoin, and in fact, suffered a loss in bitcoin for 2020, despite the crypto’s price recently hitting all-time highs.

Microstrategy’s accounting for its bitcoins shows the asinine results one sometimes gets from regulatory rules. During 2020, the company bought 70,469 bitcoins for $1.13 billion in cash. At some point after the purchase, the price fell and the company recorded impairment losses of $71 million, leaving $1.05 billion. The $1.05 billion is the carrying value of bitcoin on Microstrategy’s books as of December 31, 2020, despite, based on CoinMarketCap prices, they were worth $2 billion on that date. Interestingly, Microstrategy reported a loss for 2020 only because of the impairment of its bitcoins. This while sitting on about a billion dollars of unrecognized gains.

Until the FASB changes the rules, Microstrategy will not show a dime in earnings from its bitcoins even if prices go to the moon – to borrow a crypto phrase – unless it sells some of its bitcoins. Microstrategy’s CEO has indicated he has no intention of selling, so investors are unlikely to see gains reported on the income statement for some time. We believe the FASB will eventually change the rules, but when this might happen is anybody’s guess. Luckily for Microstrategy’s investors, the market seems to be ignoring the accounting distortion, and has rewarded the company’s shares handsomely since it started buying bitcoins.


The general view in the accounting world is that cryptocurrencies are not cash because they do not meet the requirements of being legal tender and backed by a government. They are also not considered cash equivalents because they are either not readily convertible to cash or are so near maturity that they have insignificant risk. Most crypto investors would probably argue otherwise.

What’s a Sensible Model for Crypto Accounting

Holders of cryptocurrencies benefit from rising prices, just as they suffer from falling prices. A sensible model is the fair value measurement model, currently used to account for many financial instruments. Under this model, the effects of both price increases and decreases are reflected in the income statement. If this model were adopted, Microstrategy would report about a billion dollars in pre-tax profits for 2020 from its bitcoin holdings. This is the only fair model for an asset class that is highly liquid, easily valued and gains traction by the day. It is time for the regulators to step up and implement rules that allow the financial statements to reflect the economics of investing in cryptocurrencies.