Balancing the volatility of cryptocurrencies through fair value accounting principles
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When Bitcoin was launched in 2009, its price was one-tenth of a cent. Today, a single Bitcoin costs nearly $69,000. During its time on the market, the price has repeatedly risen or fallen by thousands of dollars in a single trading day. But in the world of cryptocurrencies, volatility is commonplace.
The unpredictability of digital assets is both a defining characteristic and a major challenge for investors and accountants. As companies increasingly add cryptocurrencies to their portfolios, understanding how to properly account for their fluctuating value is critical.
However, good accountants do not worry about volatility; an accountant’s job is simply to accurately report values and assets. To achieve this, accountants should focus on implementing systems and processes to enable accurate reporting of crypto assets. Failure to do so may mean that the company is discouraged from adopting digital assets or that it is taking undue risks.
Accounting at fair value
At the end of 2023, the Financial Accounting Standards Board
A fair value model, on the other hand, is more suitable for companies and accountants because it takes into account changes in value in real time. Bitcoin mining company Marathon Holdings reported
US GAAP provides a framework for determining the fair value of assets in ASC 820. This guidance emphasizes the importance of accurate pricing to support the fair value measurement of an asset and introduces the concept of a
The FASB guidelines also require companies to report crypto activities as a separate line item on the balance sheet and income statement, in addition to the obligation
MicroStrategy, a technology company and the largest corporate holder of Bitcoin,
Weaknesses in accounting
Companies that hold crypto assets generally face similar issues, including data aggregation and the ability to make data actionable. Companies need a bird’s eye view of all crypto assets, even if they are stored in different wallets and on multiple blockchains. They also need to ensure that the information retrieved is accurate, complete, and complies with accounting rules. Most importantly, companies need to be able to efficiently aggregate and analyze data so that the fluctuating value of digital assets can be easily and accurately communicated to business partners.
Put another way, it’s the accountants’ job to report accurate holdings to the entire company, and that can only be done with efficient and accurate technology. Technology is far more reliable than humans at performing such calculations. Instead of worrying about volatility, accountants working with cryptocurrencies should prioritize automation – through a system that has been SOC-tested. Imagine spending weeks manually aggregating data on a variety of crypto assets and calculating fair value, and making a mistake. That mistake could impact every aspect of reporting and leave the company with an incomplete and inaccurate picture of its digital assets (not to mention potential audit consequences).
But that doesn’t mean that cryptocurrency volatility shouldn’t be a cause for concern. While hedging instruments such as futures contracts and options offer a way to protect against adverse price fluctuations, their accounting treatment makes matters even more complex. In addition, regulators are paying increasing attention to the accounting treatment of cryptocurrencies, including Bitcoin. Regardless of the price of a particular currency, accountants must ensure they can make an accurate valuation of the assets at all times.
The conclusion
It is undeniable that cryptocurrencies continue to gain momentum. The Bitcoin ETF was approved in January and recorded a record
Now is the time for accountants to ensure they have the workflows and technology in place to accurately report crypto holdings so that companies can more easily invest and implement digital strategies in this growing market. An inaccurate or incomplete picture of an asset as volatile as cryptocurrency can cause hidden risks to multiply quickly.
While accountants should not be concerned about volatility itself, they must take seriously their duty to accurately report the ever-changing value of crypto assets. It is the accountant’s responsibility to ensure that the company has a complete and accurate picture of its on-chain investments. Accounting policies are helpful in this regard, but must be underpinned by workflows and systems that can aggregate, analyze, and report the value of crypto assets in real time.