Balancing crypto's volatility with fair value accounting principles

When Bitcoin debuted in 2009, its price was one-tenth of a cent. Now, a single Bitcoin costs close to $69,000. During its time on the market, the price has repeatedly risen or fallen by thousands of dollars in a single day of trading. But in the world of cryptocurrency, volatility is par for the course.

The unpredictable nature of digital assets stands out as both a defining characteristic and a significant challenge for investors and accounting professionals alike. As businesses increasingly incorporate crypto into their portfolios, understanding how to properly account for its fluctuating value is critical.

Good accountants don't fret over volatility, though; the job of an accountant is simply to report values and assets accurately. To achieve this, accountants should focus on implementing systems and processes to offer accurate reporting on crypto assets. Failing to do so could mean holding back the business from adopting digital assets or causing it to take on undue risk.

Reporting at fair value

In late 2023, the Financial Accounting Standards Board released an Accounting Standards Update that refines the accounting treatment of designated crypto assets, shifting from a cost-less impairment model to a fair value one. When assets are recorded at cost and tested annually for impairments, gains can only be recorded when the asset is sold. Thus, the aforementioned volatility is not reflected in the asset's value. 

A fair value model, on the other hand, is better for enterprises and accountants because it allows for changes in value to be reflected in real-time. Bitcoin mining company Marathon Holdings reported record first-quarter earnings and 184% year-over-year growth partly because their earnings now reflect fair value moves.

U.S. GAAP provides a framework for determining the fair value of assets in ASC 820. This guidance highlights the importance of identifying accurate pricing in order to support an asset's fair value measurement and introduces the concept of a principal market. The concept is especially important to pricing cryptocurrencies given the volatile nature of the asset class and the many different exchanges and markets these assets are traded on. 

The FASB guidance also requires companies to report crypto activity as a separate line item on the balance sheet and income statements, in addition to mandating asset-by-asset disclosures. Although organizations aren't required to adhere to the new accounting standards until Dec. 15, 2024, preparing early ensures enterprises have an accurate picture of the value of their digital assets sooner rather than later. 

MicroStrategy, a tech company and the largest corporate holder of Bitcoin, noted the disconnect embedded in a cost impairment model in a letter to the FASB last year. Companies with substantial crypto holdings are more likely to adopt fair value accounting sooner than companies for which crypto assets are immaterial to the overall balance sheet.

Accounting pain points

Across the board, companies holding crypto assets still face similar pain points, including data aggregation and the ability to make data actionable. Companies need a birds-eye view of all crypto assets, even if they're stored in disparate wallets and on multiple blockchains. They also need to ensure the information being pulled in is accurate and complete and follows accounting rules. Most importantly, enterprises need the ability to aggregate and analyze data efficiently, so the fluctuating value of digital assets can be easily and accurately communicated to business stakeholders.

Put another way, it's the job of accountants to report accurate holdings back to the business at large, and that can only happen with efficient and accurate technology. Technology is far more reliable than humans when it comes to executing such calculations. Instead of worrying about volatility, accountants working with crypto should prioritize automation — through a system that has been SOC-tested. Imagine spending weeks manually aggregating data pertaining to a wide array of crypto assets and calculating fair value, only to make a mistake. That mistake could impact every aspect of reporting, and cause the business to have an incomplete and inaccurate picture of its digital assets (let alone potential audit consequences).

That's not to say the volatility of cryptocurrency shouldn't be a concern at all. Hedging instruments such as futures contracts and options do offer a means of protecting against adverse price movements, but their accounting treatment adds another layer of complexity. Additionally, regulatory bodies are paying increasing attention to the accounting treatment of cryptocurrencies, including Bitcoin. Regardless of the price of any given currencies, accountants must ensure they can offer an accurate assessment of assets at all times. 

The bottom line

It's indisputable that cryptocurrency continues to gain momentum. Bitcoin's ETF was approved in January and saw a record $4.6 billion of volume during its first day on the market, while an Ethereum ETF was approved in late May. As of June 4, 2024, the total market cap of Bitcoin ETFs was $78.27, showcasing the remarkable demand that exists. ETFs and the FASB guidance are just two indicators and drivers of continued crypto adoption. As more things move on-chain, businesses will find themselves at a juncture: is our organization digital-first or not? Or more specifically, is our organization prepared to jump headfirst into the mainstream and discover the enhanced payment security, balance sheet diversification and expanded customer reach associated with adopting digital assets? 

The time is now for accountants to ensure they have the workflows and technology in place to accurately report crypto holdings so companies can invest and execute on digital first strategies in this growing market with greater ease. Painting an inaccurate or incomplete picture of an asset as volatile as cryptocurrency can cause hidden risks to multiply quickly.

While accountants shouldn't worry about volatility itself, they must take seriously their duty to accurately report the ever-changing value of crypto assets. It's the accountant's responsibility to ensure the business has a full and accurate picture of its on-chain investments. Accounting guidance is helpful in this regard, but it must be underpinned by workflows and systems that can aggregate, analyze and report the value of crypto assets in real-time.