Hiromi Yamaoka – the former leader of the Bank of Japan’s financial settlement department – urged the institution to avoid using the digital yen as a part of the country’s monetary policy. He believes the product could severely damage the local economic system.
Japan Should Not Aim at Digital Yen
Similar to many central banks around the globe, the Bank of Japan has also set its sight towards creating a digital form of its national currency. In April 2021, the organization kicked off a testing program to determine the technical feasibility of such a product. The trial will consist of two phases, as the first is set to be completed by March this year.
However, Hiromi Yamaoka – an ex-member of the BOJ – is not so supportive of the idea. Despite claiming that Japan’s payment systems need to change with the help of digital money, he opined that the central bank should not employ the digital yen to gain extra policy leverage.
Yamaoka, currently in charge of a private sector digital currency project, predicted that a CBDC might have disastrous consequences for the local financial network. He added that the advantages of applying negative interest to a CBDC are not well defined:
“Some say that negative interest rates could work more effectively with a digital currency, but I don’t think so.”
He also doubts that Japanese households will spend more money even if the digital yen becomes an instrument for mass settlements.
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Hiromi Yamaoka, Source: Reuters
China – the country leading the global race on launching a central bank digital currency – announced it would allow athletes and spectators to use the product during the Beijing Olympic games (starting this week).
Japan’s Finance Minister Shunichi Suzuki said he is aware of the Chinese efforts and asserted that the Ministry will closely monitor the experiment.
The Federal Reserve Also Sees Some Minuses
The central bank of the USA also has doubts about CBDCs. Earlier this month, the Fed stated that such monetary products could create “safe, digital payment option for households and businesses.” CBDC transactions could result in faster settlement opportunities between nations.
On the other hand, the digital version of a national currency might work against people’s privacy as the government could control the monetary product entirely. It may also be harmful to America’s financial stability and not advance the existing means of payment, the Federal Reserve concluded.
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Cryptocurrencies had a volatile week after Bitcoin’s (BTC) sudden crash to $33,000 on Jan. 24. However, the sharp 9% drop fully recovered within 8 hours after BTC price regained the $36,000 support.
On Jan. 26, Bitcoin rallied to $38,960 but it could not sustain the level and corrected by 8.8% in the following 8 hours. When factoring in the recent ups and downs, Bitcoin managed to only gain a meager 1.6% over the past seven days.
Even with the considerable price swings, the aggregate futures contracts liquidations were relatively low. Longs (buyers) had $570 million futures terminated, while shorts (sellers) faced $690 million. Data shows that Bitcoin futures represented 41% of the total $1.25 billion liquidations.
Regulatory winds could be limiting BTC’s price recovery
The total crypto market capitalization presented a modest 1.6% weekly increase, in line with Bitcoin’s performance.
Total crypto market capitalization, USD billion. Source: TradingView
Notice how the Jan. 24 price is forming higher lows and currently shows support at $1.75 trillion. Even with the price being 22% down in 2022, the total crypto market capitalization showed a healthy 12.5% bounce since the Jan. 24 low.
Investors seem to be digesting this week’s regulatory news where United States Congressman Ted Budd submitted an amendment to scrub a bill provision allowing the U.S. Treasury to unilaterally prohibit certain financial transactions without public input.
If passed in its current form, the America COMPETES Act of 2022 would result in a significant blow to the cryptocurrency industry, as Coin Center’s executive director Jerry Brito stated.
Investors were negatively impacted by news that the U.S. White House is reportedly preparing an executive order on crypto to make government agencies conduct risk analysis on cryptocurrency as a national security threat.
Metaverse tokens decoupled after last week’s Apple news
Steady bearish newsflow might have been the cause for cryptocurrencies’ recent price action but there were some stellar performances from Metaverse tokens.
Top weekly winners and losers on Jan. 31. Source: Nomics
Apple (AAPL) CEO, Tim Cook, said in an investors’ call on Jan. 27 that metaverse applications have a lot of potential and that his company is investing in augmented reality developments on its devices.
The news was enough to catapult metaverse-related tokens by up to 36%, including Flow, The Sandbox (SAND), Decentraland (MANA), Enjin Coin (ENJ), and Arweare (AR).
On the other hand, Terra (LUNA) was impacted after the Avalanche-based reserve currency Wonderland Money (TIME) announced that a pending proposal would determine whether the project closes up shop or not. As a result, the MIM stablecoin dipped below 1.00 and some speculate that this may have had a knock-on effect on Terra’s LUNA and UST token.
Scalability and interoperability blockchain solutions Cosmos (ATOM), Fantom (FTM), and Harmony (ONE) presented negative performances after the Ethereum hash rate surpassed 1.11 PH/s, its highest level ever registered. A higher hash rate indicates that more miners are joining the network, which helps to cement blockchain security.
Tether premium and CME futures showed improvement
The OKEx Tether (USDT) premium measures the difference between China-based peer-to-peer (P2P) trades and the official U.S. dollar. Figures above 100% indicate excessive demand for cryptocurrency investing. On the other hand, a 5% discount usually indicates heavy selling activity.
OKEx USDT peer-to-peer premium vs. USD. Source: OKX
The Tether indicator continued to display strength as it stood above 99% over the past seven days. That is in stark contrast to three weeks ago when panic selling from China-based traders drove the indicator to a 4% discount.
To confirm that the crypto market structure has improved, traders should analyze the CME’s Bitcoin futures contracts premium. This metric analyzes the difference between longer-term futures contracts to the current spot price in regular markets.
Whenever this indicator fades or turns negative (backwardation), it suggests that there is bearish sentiment.
BTC CME 2-month forward contract premium vs. Bitcoin/USD. Source: TradingView
These fixed-month contracts usually trade at a slight premium, indicating that sellers request more money to withhold settlements for longer. As a result, futures should trade at a 0.5% to 2% premium in healthy markets, a situation known as contango.
Notice how the indicator flirted with the backwardation from Jan. 18 to 24 as Bitcoin dipped below $42,000. However, as BTC showed signals that $33,000 could have been a local bottom, the futures markets recovered a healthy 0.5% premium.
Considering that the aggregate cryptocurrency market capitalization is down 22% in 2022, the market structure looks primed for a recovery.
Barring a significant change in these fundamentals, Bitcoin bulls are probably beginning to feel comfortable adding positions below $40,000.
The views and opinions expressed here are solely those of theauthorand do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
A widely followed crypto trader has issued a warning to Cardano holders as ADA moves closer to the $1 level.
The pseudonymous trader known as Capo tells his 239,000 Twitter followers that Cardano ADA is currently in the middle of a clean triangle pattern hinting at bearish price action in the coming days.
“ADA confirming the bearish triangle.”
Source: Capo/Twitter
Previously, Capo thought Bitcoin would kick off a relief rally past $40,000 before a fairly major downward move. Now, however, the trader is leaning more towards BTC beginning a bearish capitulation happening in a more direct fashion.
“Whales are adding supply and removing bids below the current price. It seems that it will go just straight down without touching 40k.
I’ve sold a little bit more. Currently 85% in USDT, ready for what could be coming.
Stay safe.”
While many altcoins have been outperforming Bitcoin during the recent market correction, Capo says that overall, the altcoin market looks weaker than BTC. He takes a look at Bitcoin dominance, which compares the market cap of BTC to the rest of the crypto space.
“Altcoins look even worse than $BTC. With the Bitcoin dominance forming a triple bottom, and the OTHERS (altcoins) chart wanting to retest the range low, it wouldn’t surprise me to see a 50% drop in altcoins in the next few days.
Stay safe.”
Source: Capo/Twitter
Earlier this week, Capo predicted an “ultimate capitulation” in crypto markets that would take Bitcoin down below $30,000 before a bullish reversal.
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A closely followed crypto strategist and trader is unveiling a scenario where Bitcoin (BTC) regains its bullish momentum and skyrockets over 80% this year.
In a new strategy session, pseudonymous analyst DonAlt says that Bitcoin is trading in a wide range in the weekly timeframe between $33,000 and $60,000.
According to DonAlt, the massive range offers two solid entry opportunities for BTC.
“There [are] two places where you can take a trade in this instance: one the range low ($33,000), which I did. And then two, and I’m going to take that trade if it presents itself, is breakdown into reclaim [of $33,000] into okay… mega moon it [to $60,000].”
A move from the range low of $33,000 to the high at $60,000 represents an upside potential of 81.82% for BTC.
Although the crypto strategist is bullish on the idea of temporarily losing $33,000 support, he explains to his 380,200 Twitter followers why going below that key level is dangerous for BTC.
“Honestly, the last thing I’m gonna do is bid $28,000. It’s like bidding the failure of $6,000 in 2018. Why would you wanna do that? If we should lose the current range ($33,000-$60,000) I’d much rather buy once we reclaim the range low or much much lower.”
Source: DonAlt/Twitter
During the bear market of 2018, Bitcoin breached support at $6,000 and lost nearly 50% of its value in less than one month.
In the short term, DonAlt doubts that Bitcoin will rally to as high as $44,000 during this initial bounce.
“Daily honestly looking kinda wild. Expecting Twitter experts to flip back bullish somewhere between the two next resistance lines. Praying we get that far.”
Source: DonAlt/Twitter
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Game publisher Team17 revealed plans to create Ethereum-based NFTs inspired by the Worms franchise.
The announcement has received significant backlash on social media, with one game developer saying it will no longer work with Team17.
Team17, an independent video game publisher, announced today that it has partnered with Reality Gaming Group (RGG) to launch NFTs based on the long-running Worms video game franchise. And as with other recent video game-related NFT reveals, the news was met with significant backlash from players and developers alike.
TheMetaWormsproject will feature artwork from the Worms series’ 26-year history. The Worms franchise has sold more than 75 million games across numerous platforms since first debuting on Windows PC in late 1995. No release date or price point has been announced for the Worms-themed NFTs.
An NFT acts like a deed of ownership to a provably scarce digital item, including artwork, collectibles, and interactive video game items. The NFT market exploded in 2021, reaching$23 billion in trading volumeper data from DappRadar. However, NFTs have faced significant scrutiny, in part due to theenvironmental impact of Ethereum, the leading network for NFTs.
The NFT collectibles will be minted on Reality Gaming Group’s Digital Asset Trading (DAT) platform. DAT is Reality Gaming Group’s custom sidechain scaling solution forEthereum, which offloads the vast majority of transactions to a more energy-efficient blockchain than Ethereum’s own mainnet.
Reality Gaming Group will also contribute a portion of sales toCoin4Planet, which is building vertical worm beds to regenerate food waste into natural fertilizer with an aim to reduce carbon emissions.
Despite RGG’s “environmentally friendly” claims, many gamers aren’t buying it. As with other recent gaming-related NFT projects fromUbisoft QuartztoS.T.A.L.K.E.R. 2, the MetaWorms announcement was met with similar claims on social media that all NFTs kill the environment, amid other complaints.
The backlash reached a fever pitch this afternoon when indie developer Aggro Crab—which developed the Team17-published game, Going Under—tweeted that itwould no longer workwith the publisher if the NFT initiative continues ahead as planned.
“We believe NFTs cannot be environmentally friendly, or useful, and really are just an overall fucking grift,” the statement reads, in part. “Needless to say, we will not be working with them on further titles, and encourage other indie developers to do the same unless this decision is reversed.”
Decryptreached out to Team17 for comment on its NFT plans, but the publisher did not immediately respond.
A Team17 representative toldEurogamerthat the NFT project came about via a licensing arrangement, similar to one used for physical merchandise, and that the publisher has no plans of integrating in-game NFTs or implementing token-driven gameplay models.
“Team17 has no plans to introduce NFTs orplay-to-earn NFT mechanicsinto any of its indie games label titles,” the spokesperson toldEurogamer.
The vocally negative response is similar to those that other traditional video game publishers and developers have faced in recent weeks when announcing NFT plans.
Ubisoft has been the most prominent example with its launch of theTezos-based Ubisoft Quartz in-game NFT items platform, which began with the online shooter, Tom Clancy’s Ghost Recon Breakpoint. Despite the backlash, Ubisoft revealed that it wouldcontinue on with the initiative.
Also recently, S.T.A.L.K.E.R. 2 publisher GSC Game Worldcanceled plans to add NFTsto the upcoming game, while gaming-centric chat appDiscord axed a planned NFT wallet integrationfeature following user complaints. Major game publishers such asSquare EnixandKonamihave likewise faced criticism after revealing their own respective NFT initiatives.
Despite some resistance from the traditional video game community, NFT-driven video games have gained steam in recent months. Play-to-earn monster battlerAxie Infinityhas generatednearly $4 billion worth of NFT trading volume, for example, while upcomingmetaversegameThe Sandboxhas sold hundreds of millions of dollars’ worth ofNFT virtual land plots.
Shopify CEO Tobias Lütke will join Coinbase’s board of directors, according to an announcement from Coinbase.
Shopify previously adopted BitPay and Coinbase Commerce as payment gateways beginning in 2013 and 2014 respectively.
The company has begun to test NFT features in recent months and explored other cryptocurrency projects in the past.
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Shopify CEO Tobias Lütke will join Coinbase’s board of directors, according to an announcement from the crypto exchange.
Coinbase and Shopify Will Focus on DeFi
Lütke will help Coinbase offer its crypto services to more users and businesses around the world.
Lütke said that Shopify and Coinbase have a “like-minded vision,” noting that “[DeFi] and entrepreneurship exemplify the promise of Web3 where opportunity exists for the many, not the few.” Coinbase expressed its plans to work with DeFi last summer, while Lütke explored DeFi possibilities on Twitter in April 2021.
Lütke will serve on the board alongside Coinbase co-founder and CEO Brian Armstrong and co-founder Fred Armstrong.
Other members of Coinbase’s board of directors include Andreessen Horowitz (a16z) members Katie Haun and Marc Andreessen, Union Square Ventures co-founder Fred Wilson, DoorDash executive Gokul Rajaram, and former Cisco CFO Kelly Kramer.
Coinbase is currently the third-largest crypto exchange, with $3.5 billion in volume handled over the past 24 hours.
Shopify Is Highly Interested In Crypto
Coinbase noted that Shopify was an “early adopter of crypto through [its] integration with Coinbase Commerce.” In fact, the company began to support Bitcoin payments via BitPay in 2013, several months before it adopted Coinbase Commerce in 2014.
Those various integrations mean that merchants on Shopify can accept cryptocurrency payments via their storefront.
Shopify also joined Facebook’s Diem project in 2020 and is still listed as a member on Diem’s official website. However, its role is unclear now that Diem appears to be failing.
The company more recently announced support for non-fungible tokens (NFTs) last summer and launched beta access in December.
Incidentally, both Coinbase and Lütke are using Twitter’s NFT feature to display their profile picture, with Coinbase using a tokenized version of its logo and Lütke using a CryptoPunks token.
Disclosure: At the time of writing, the author of this piece owned BTC, ETH, and other cryptocurrencies.
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Cryptocurrency prices are plummeting. According to one estimate, crypto assets have lost around $1.35 trillion ($1.9 trillion) in value since November, with some crypto price crashing by as much as 80%. Many investors are in a tight spot.
The good news is that world economy isn’t poorer. As a result, there won’t be much of an economic response to the new prices.
Crypto Price Fall Dominates Headline
The recent crypto news has been dominated by the price collapse of numerous major currencies.
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Since November, the price of bitcoin has been dropping. The price of cryptocurrencies has also dropped in the last week, according to reports, due to new US regulations on digital assets. Bitcoin’s price dropped from $69,000 in November to $32,951 last week.
Bitcoin Price Chart. Source: Bloomberg
Ethereum’s price has plummeted to roughly $2,400, down from nearly $5,000 at the end of 2021. Top cryptocurrencies like XRP, Solana, BNB, and Cardano have had their value plummet by up to 30%. The big crypto meltdown of 2022 wiped out $1.5 trillion from the industry as a whole.
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The impact of the cryptocurrency meltdown on the rest of the economy is minimal. The $1.5 trillion in losses is only approximately 6% of the US GDP. Second, the cryptocurrency ecosystem is largely detached from the rest of the economy. Because banks have avoided crypto, the crash has had little effect on the financial market.
Many have held on to the believe that US regulations contributed to the bloodbath. Due of the national security risks posed by Bitcoin, the Biden administration is attempting to develop a strategy to regulate cryptos.
As a result of the Federal Government’s measures, traders have been urged to sell their Bitcoin holdings in large numbers.
The US Federal Reserve’s policy changes have an impact on Bitcoin pricing.
The Federal Open Market Committee will raise the double monthly rate, cutting asset purchases, according to Federal Reserve Chair Jerome Powell. The Federal Reserve implemented these steps in order to curb inflation and its detrimental influence on Bitcoin prices.
Geopolitical disputes can also have a negative impact on the market. Geopolitical disputes can also have a negative impact on the market. Kazakhstan recently faced electricity shortage due to internal crisis. Widespread tensions are also building between Ukraine and Russia.
Related article | Bitcoin Bears To Resume Assault? Why BTC Could Crash To $33K
Ending January In Confusion
As the month closes, many investor are in cautious optimism. However, inflows have turned positive since last week.
According to CoinShares, digital asset investment products received $19 million in cumulative inflows last week. With $22 million and $32 million in inflows, respectively, bitcoin and multi-asset funds led the gains.
The news wasn’t all good, as Ethereum continued to face unfavorable sentiment, with $27 million in outflows. This was the eighth week in a row that ETH-focused funds have seen outflows. Outflows were also recorded during the week for Solana, Polkadot, and Cardano products.
Since December, institutional investors have been selling digital asset products in droves, taking profits and reducing their stakes during market selloffs. According to CoinShares data, Bitcoin funds have suffered a net outflow of $131.8 million so far this year. There have been $111.2 million in withdrawals from Ether funds.
Bitcoin dropped as much as 2.9% to roughly $36,680 on Monday before recouping losses. It has now dropped more than 18% in a month, the worst start to a year since 2018’s 29% drop and a bleak follow-up to December’s 19 percent drop.
BTC/USD recovers to $38k. Source: TradingView
Between November’s peak and January’s lows, Bitcoin has lost approximately half of its value. According to Goldman Sachs’ Zach Pandl and Isabella Rosenberg, this loss puts it at “the low end of the range” of large drawdowns in the past. Since 2011, the pair estimates that the coin has had five big pullbacks from all-time highs, with an average peak-to-trough fall of 77 percent. They noted in a note that the decreases continued on average seven to eight months. According to them, the highest cumulative Bitcoin fall, a loss of 93%, occurred in 2011.
Related article | Bitcoin Funding Rates Remain Negative For More Than A Week
Featured image from Unsplash.com, charts from TradingView.com, Bloomberg
Meme coin Shiba Inu recently announced its move into the metaverse. The ‘Shibverse’ as it’s called will usher the cryptocurrency into a booming space, presumably to provide more utility for the digital asset. This news is no doubt well received by the community as it allows SHIB to participate in what is a booming industry. But how has the price of the digital asset reacted to this so far?
Shiba Inu Announces Shibverse
Shiba Inu, one of the most popular meme coins, and winners of 2021 has announced that it would be making its debut in the metaverse with the Shivers. It comes as no surprise as the team has been forthcoming about working on more use cases for the cryptocurrency. Previously, the Shiba Inu team had announced that it was launching its own game, where SHIB will serve as the utility token.
Related Reading | Ethereum Bullish Signal: Number Of Holders With 1 ETH Touches New ATH
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The announcement tweet has included a sneak peek of the metaverse, which featured a high-resolution picture of the popular Shiba Inu dog breed standing in the middle of the woods with what looks like a pickaxe in its mouth.
As promised, we are so excited to announce our first special surprise for the year #ShibArmy!
In 2022, we are reaching new heights and welcoming the #Shiberse 🌎. An immersive experience for our ecosystem and the Metaverse space!
We can’t wait to show you more. Woof! 🐶 pic.twitter.com/tCRQ1m1RiT
— Shib (@Shibtoken) January 24, 2022
Given the popularity of the metaverse in recent months, it is no surprise to see more established projects entering the space. Social media giant Facebook (now Meta), is one of the most notable entrants, rebranding its name and image to fit into its metaverse mission going forward. The retail chain, Walmart, has also made moves into the metaverse according to a number of patent filings that were made public.
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How Has SHIB Fared On The Charts
Following the announcement of Shibverse, the price of the digital asset had responded positively. One thing to note is that SHIB has been on a downtrend since it hit its all-time high last year and has continued on this path. News like these are expected to help the value of coins like Shiba Inu but the cryptocurrency seemed adamant to continue its journey downwards.
SHIB trending at $0.00002 | Source: SHIBUSD on TradingView.com
The announcement had triggered a small rally in the price of the altcoin, sending it above the $0.0000225 point. However, this would prove to be only temporary as it continued downward.
Related Reading | Ethereum Whales Quietly Filled Up On ETH While Broader Market Panicked
Sentiment for the meme coin remains firmly in bearish territory, which does not spell good news for the long-term performance of the digital asset. Additionally, the majority of Shiba Inu holders are now at loss, making it a less than profitable venture for crypto investors.
In the last 24 hours, SHIB has continued to trend low hitting a low point of $0.00002. As the new week is ushered in and the market begins to open up, there could be some upside seen in the price of assets, although it is unlikely that it will be significant in any way.
Featured image from Thewistle, chart from TradingView.com
JP Morgan analysts have said that Bitcoin will struggle to get institutional adoption because of its volatility while Ethereum will face more competition from rival blockchains.
In a note for investors, analysts at the New York City-based bank said that they saw “significant challenges” going forward for the two biggest cryptocurrencies by market cap.
But the note also said that the cryptocurrency market’s current price dip looks “less like capitulation relative to last May,” when pricesshed billionsin one week.
“We think the biggest challenge for Bitcoin going forward is its volatility and the boom and bust cycles that hinder further institutional adoption,” the note read.
It added that Bitcoin, which is down 44% from its November all-time high of $69,044, trading for $38,449 right now, was also five times more volatile than gold. Many cryptocurrency investors claim that Bitcoin works as a form of “digital gold,” meaning that it serves as a hedge against inflation like the precious metal.
The analysts noted that Ethereum competitors—Solana, Terra, Binance Smart Chain, and others—were gaining traction in the world of decentralized finance (DeFi) and non-fungible tokens (NFTs).
DeFi refers to apps that aim to automate what banks do by using blockchain networks. Such apps are usually built on Ethereum’s network but because so many people use it, it has become costly and slow. Other blockchains have popped up to compete with Ethereum and, as the JP Morgan analysts noted, they are doing well.
“What has been striking during this month’s correction is that Ethereum has not managed to re-capture market cap share vs. its main competitors as its price declined by a similar magnitude to smaller altcoins,” the note said.
NFTs are digital tokens representing anything from art, video clips and music which tend to exist on Ethereum’s network. But recently other networks like Solana have muscled in, the analysts noted.
Solana’s network ispopularbecause it is cheaper and faster than Ethereum’s. And NFT collectors areincreasingly looking to use itto trade NFTs. Solana, however, has its own share of problems and frequently suffers from network congestion and slowdowns. Last September, the network went down for a full 17 hours. The price of SOL, Solana’s native cryptocurrency, remains resilient, however; at just under $100, it remains the seventh-largest crypto asset by market cap.
Disclaimer
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.
MIAMI, FLORIDA – JUNE 04: MicroStrategy CEO Michael Saylor speaks at the Bitcoin 2021 Convention (Photo by Joe Raedle/Getty Images)
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What Happened
MicroStrategy has been purchasing bitcoin since 2020 as a part of its capital allocation strategy. The company holds over 120,000 BTC as of the end of December 2021. As a U.S. public company, MicroStrategy is required to report earnings and transactions related to bitcoin under Generally Accepted Accounting Principles (GAAP) standard. However, properly accounting for these transactions in GAAP financial statements is an emerging area. The current GAAP standards that classify digital assets as intangible assets with indefinite lives (similar to goodwill and trademarks of a business), fail to capture the true financial behavior of bitcoin holdings. This treatment requires companies to report a loss when digital assets’ prices fall below the cost; however it prohibits marking up digital assets to it’s true value when prices later recover. This discrepancy can negatively impact a company’s net income, which could incorrectly translate into lower price per share.
To address the shortcomings of GAAP earnings due to bitcoin impairment losses, MicroStrategy added a “Non-GAAP Financial measures” section to Form 10-Q (Quarterly financial report public companies file with the SEC) for the quarter ended September 20, 2021. However, the SEC objected to this new treatment
Key Concepts
The Financial Accounting Standards Board (FASB) is the IRS of the accounting world. The FASB is responsible for creating Generally Accepted Accounting Principles (GAAP). As of the date of posting, there are still no cryptocurrency specific GAAP rules.
In the absence of these crypto specific rules set by the FASB, in 2020, a working group formed by the American Institute of CPAs (AICPA) came up with a Digital Asset Practitioner Guide addressing how to classify cryptocurrencies in GAAP financial statements.
How Cryptocurrencies are Classified on GAAP Financials
According to the white paper issued by the AICPA, crypto assets cannot be classified as “cash or cash equivalents” on GAAP financial statements because they are not backed by a sovereign government or considered legal tender. They cannot be classified as a financial instrument or a financial asset because they are not cash (see above why) and do not represent any contractual right to receive cash or another financial instrument. Additionally, since cryptocurrencies are intangible, they do not clearly meet the definition of inventory and cannot be labeled as inventory on the balance sheet either.
After going through the process of elimination, we are left with only one category to classify cryptocurrencies under: intangible assets with indefinite life. This is how MicroStrategy currently classifies bitcoin in their financial statements.
(3) Digital Assets: The Company accounts for its digital assets as indefinite-lived intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other. The Company’s digital assets are initially recorded at cost. Subsequently, they are measured at cost, net of any impairment losses incurred since acquisition” (10-Q, page 11)
Practical Mismatches with Intangible Asset Treatment
There are a few problems with classifying cryptocurrencies as intangible assets with indefinite life. Practically speaking, this accounting treatment does not align with the reality. Cryptocurrencies like bitcoin are liquid and work extremely similar to cash. The purpose of GAAP financial statements is to paint an accurate, unbiased picture of the underlying entity’s financial situation. By treating crypto assets as intangible assets, GAAP financials fails to communicate the high liquidity of crypto assets.
Second, once an item is classified as an indefinite life intangible asset, it should be tested for impairment. This means, if the value of the crypto asset has gone down at the end of the reporting period, the business gets to write off that amount as an impairment loss (not to be confused with tax losses) on the income statement. However, if the value goes back up (which is common due to high volatility), the business does NOT get to mark up the value of the asset. This overly conservative approach often results in businesses showing poor operating results under GAAP which negative affects investor sentiment and stock price.
For example, MicroStrategy reported $65,165,000 of impairment losses for the three months ending September 30, 2021, because the market value of bitcoins went below their purchase price. Although this 65M impairment loss was not a cash outflow from the business, it was the largest operating expense which contributed to a net loss of $36,136,000.
Similarly, during the three months ending September 30, 2021, Tesla reported 51M of impairment loss. Square reported 6M of bitcoin impairment loss in the same period.
MicroStrategy consolidated statement of operations
MicroStrategy
To clarify the situation and show the true performance of the business to investors, MicroStrategy added a section named, “Non-GAAP Financial Measures” in their 10-Q. This section shows what would their operating income be without taking impairment and few other non-GAAP amounts (not related to digital assets) into consideration.
According to this schedule, if impairment loss was not considered (and few other items not relevant to bitcoin), the company would have a net income of $18,566,000.
Reconciliation of non-GAAP net income schedule
MicroStrategy
SEC Letter to MicroStrategy
The SEC objected MicroStrategy’s Reconciliation of non-GAAP net income schedule above. On December 3, 2021, it sent the company a comment letter and advised the company to remove it under the Rule 100 of Regulation G.
Reg G requires public companies to “disclose or release such non-GAAP financial measures to include, in that disclosure or release, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the disclosed non-GAAP financial measure to the most directly comparable GAAP financial measure”.
Although we don’t know the specifics of the situation, it is clear that MicroStrategy’s 10-Q includes GAAP financials & a reconciliation of non-GAAP net income schedule allowing readers to compare numbers easily. The company’s goal is to clearly communicate the true operating performance of the company minus the “paper bitcoin losses” which is required to report under incompatible GAAP rules. Therefore, the specific concern the SEC has with the presentation is unclear. It is also interesting to see that the letter is only talking about the “adjustment for bitcoin impairment charges” among other items included in the Reconciliation of non-GAAP net income schedule such as share-based compensation, interest expense and income tax effects.
On a subsequent letter from MicroStrategy dated December 16, 2021, the company accepted SEC’s comments and removed the adjustment for bitcoin impairment on the reconciliation of non-GAAP net income schedule.
Finally, the rising inflation and the uncertainly of interest rates have moved the market sentiment from investing in risky companies to value stocks of profitable companies. Microstrategy may find it challenging to show a net profit under GAAP in the coming months if the price of BTC moves sideways in a bearish market or declines further creating more impairment losses. Even when BTC goes up, Microstrategy will not be able to show a profit under GAAP unless they sell it. This situation could unfairly affect the stock price of the company. If a spot BTC ETF gets approved, investors might be better off directly investing in the ETF compared to using Microstrategy as a way to get exposure to BTC.
Next Steps
Keep an eye on how SEC approaches Non-GAAP disclosures related to bitcoin for other public companies holding bitcoin.
Further Reading
· Quick Guide To Filing Your 2021 Cryptocurrency & NFT Taxes
· How The Infrastructure Bill Is Brewing A Crypto Tax Compliance Nightmare
