(Bloomberg) -- As if the environment weren’t tough enough for one-time stock market high-flyers Tesla (NASDAQ:TSLA) Inc., MicroStrategy Inc. and Block Inc., the three companies took an estimated combined hit of $5 billion on their holdings of Bitcoin in the second quarter.
The decline in value reflects the 59% plunge in the cryptocurrency’s price in the period ending June 30. Bloomberg calculated the loss based on the companies’ previous disclosures about their Bitcoin stashes.
While those are paper losses only for MicroStrategy and Block until they sell, Tesla has locked in some of the drop: The carmaker unloaded the majority of its Bitcoin in the quarter, and an impairment hurt profitability, it said Wednesday.
The toll shows the danger that companies run when they decide to stash some of their corporate treasury -- normally held in cash or ultra-safe short-term Treasuries -- in volatile cryptocurrencies. While Bitcoin has rebounded a bit from its low last month under $18,000, there’s no guarantee it will ever get anywhere near its November high of almost $68,000.
“It’s very risky for companies to purchase Bitcoin, which is an extremely volatile asset, and puts the company’s cash at risk of severe losses,” said Jerry Klein, managing director at Treasury Partners, a New York firm that manages cash for corporations.
There are at least 27 public companies with Bitcoin on their balance sheet, according to CoinGecko. While most of them are cryptocurrency miners and financial service firms, more than 85% of the Bitcoins held at public companies were with software company MicroStrategy, carmaker Tesla and payments provider Block.
For investors, the holdings add a layer of risk to what are already volatile stocks. Their shares have been hit by surging inflation, rising interest rates and the prospect of a possible recession. Tesla’s stock is down 30% this year, while MicroStrategy and Block have each lost about half their value.
All three companies are led by big proponents of the cryptocurrency. MicroStrategy Chief Executive Officer Michael Saylor has made one of the boldest moves, with his company shelling out almost $4 billion to buy 129,699 Bitcoins. Based on the price move, the tokens dropped in value by $3.4 billion in the second quarter.
The software firm became the first public company to invest the lion’s share of its treasury in Bitcoin in 2020 after Saylor questioned the conventional strategy of investing in short-term US government securities when yields tumbled, adding that inflation would make cash worthless.
Elon Musk’s Tesla bought $1.5 billion of the token early last year and quickly sold some of that stash at a gain. Musk said around that time that the cryptocurrency is a “good thing” and on the verge of getting “broad acceptance by conventional finance people.”
It sold 75% of its remaining holdings in the second quarter because it was unsure how long Covid lockdowns in China would last, so it wanted to have extra cash on its balance sheet, Musk said on an earnings call Wednesday. The company operates a factory in Shanghai.
“We are certainly open to increasing our Bitcoin holdings in future,” he said on the call. “So this should not be taken as some verdict on Bitcoin.” Tesla hasn’t sold any of its holdings of another token, Dogecoin, he said.
Bitcoin fell 1.2% to $22,972 as of 5:35 a.m. in New York.
Block, run by Bitcoin enthusiast and Twitter (NYSE:TWTR) co-founder Jack Dorsey, owned $366 million worth of that coin as of March 31, according to a company statement.
Investors will be watching earnings from MicroStrategy and Block, on Aug. 2 and Aug. 4, respectively, to see how big a writedown each takes on the holdings.
Marking Tesla’s estimated holdings and Square’s stake at the June 30 Bitcoin market price of about $18,731 puts the combined paper losses for the three companies at about $5 billion, according to Bloomberg calculations. About 70% of that comes from MicroStrategy.
A representative for Block declined to comment on the company’s Bitcoin holdings, while Tesla and MicroStrategy didn’t respond to requests for comment.
“I think the companies that hold Bitcoin will try to hold onto it now that it has fallen so far,” said Matt Maley, chief market strategist at Miller Tabak + Co. “However, they might be forced to sell it due to margin calls if it sees another meaningful down leg.”