Cryptocurrencies: Investment and risk

By Johnny Lee and Marcus Veith, Grant Thornton

According to Bloomberg, Tesla’s investments in Bitcoin total $1.26 billion. Meanwhile, MicroStrategy CEO Michael J. Saylor told CNBC that he believes Bitcoin will appreciate in value until it becomes a “stabilizing influence” for the entire global financial system.

Some might say investing in cryptocurrency is a bold and risky strategy, but with mainstream adoption on the rise, should leadership teams look at cryptocurrencies for businesses’ treasury operations?

The complexities of investing in cryptocurrencies include accounting and financial reporting challenges. At present, reporting companies are principally required to account for digital assets as intangible assets, recorded at cost and measured for impairment. Price increases can only be recognized in financial statements upon liquidation of the digital asset. A company could build up reserves that it can release upon the sale of the digital asset. The other challenge is the auditability of these assets and whether a company’s auditors have the ability and technical wherewithal to audit them.

Nonetheless, many companies are looking to cryptocurrencies as a hedge against inflation. While the volatility of cryptocurrencies generally is a discouraging factor for many organizations, the fiscal policies adopted by central banks around the world are making corporate cryptocurrency investment a more attractive option.

A medium of exchangeMore volatile cryptocurrencies, such as Bitcoin, will likely continue to function as an inflation hedge or long-term store of value, but businesses are increasingly adopting more practical uses for cryptocurrencies as well. According to Inc. magazine, 32% of U.S. small business owners accept cryptocurrencies as payment. On a larger scale, in November 2020, PayPal announced that it would open its network to Bitcoin and other cryptocurrencies, and that “all eligible PayPal accountholders in the [United States] can now buy, hold, and sell cryptocurrency directly with PayPal.”

While it remains doubtful that volatile cryptocurrencies will ever play a major transactional role, it is conceivable — and increasingly likely — that such a role could be filled by privately issued stablecoins or central bank-issued digital currencies (CBDC). The benefit of these so-called “stable” cryptocurrencies is that their market prices don’t fluctuate significantly thanks to underlying fiat reserves. Of equal importance, transaction settlement when using these stablecoins is fast and inexpensive compared to traditional fiat-currency regimes.

Managing risksThe rapid adoption of cryptocurrencies and the ongoing scrutiny by financial regulators of cryptocurrencies create risk for companies embracing a digital asset strategy. While the pseudo-anonymity of virtual currencies has been leveraged by criminals to conduct a range of illegal activities, most studies reveal that the percentage of illicit activity enabled by cryptocurrency is small compared to that enabled by traditional fiat-based regimes. Regulators are looking to implement a framework to reduce the potential risks posed by this new class of financial assets.

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