In 2021, Tesla bought US$1.5 billion worth of Bitcoin. Even for CEO Elon Musk, that wasn’t spare change. It represented more than two per cent of the automaker’s assets. Crypto prices were surging and Tesla reported US$27 million in gains from selling digital assets that year.

Then, in 2022, prices collapsed. Tesla sold US$936 million worth of crypto and took a US$140-million loss.

So how did Tesla — and other firms — report swings in crypto holdings to investors? Rotman School of Management accounting professors Ramy Elitzur and Wendy Rotenberg wanted to know.

The pair noted that until 2018, corporate crypto holdings were insignificant. Then some public companies began piling into Bitcoin and other digital currencies, for reasons ranging from treasury strategy to operational needs. Tesla, for instance, said it would allow customers to buy vehicles with Bitcoin.

But there was a problem. At the time, the Financial Accounting Standards Board hadn’t established clear accounting rules for crypto assets. That grey area gave firms leeway to omit disclosures or to shape the story they told investors. In 2023, the FASB created crypto reporting and disclosure rules.

Elitzur and Rotenberg decided to explore voluntary crypto disclosures prior to the new rules.

Their paper, published in the Journal of Alternative Finance, offers cautionary advice. In financial reporting, how companies say something matters as much as what they say.

Public companies release a lot of information: annual reports (including management discussion and analysis), quarterly filings, proxy statements and press releases. But disclosure isn’t just about numbers. Tone, wording and placement, even what’s buried in footnotes, shape how investors read the facts.

“Firms are trying to manage people’s impressions,” Rotenberg says.

Elitzur and Rotenberg zeroed in on five public companies with crypto assets: Tesla Inc., PayPal Holdings Inc., Coinbase Global Inc., MicroStrategy (now Strategy Inc.) and GameStop Corp.

Each company had different reasons for holding crypto. GameStop planned to allow gamers to pay with and to cash out their winnings with digital currencies. MicroStrategy’s then-CEO, Michael Saylor, saw Bitcoin as a hedge against inflation and a currency with greater long-term upside than cash.

The 2018–2022 study period spanned a boom-bust cycle for crypto. In November 2021, Bitcoin’s price soared to nearly US$70,000. A year later, it plunged below $17,000 in what became known as the “crypto winter.”

To understand how these firms reported their cryptocurrency activities in different market conditions, Elitzur and Rotenberg studied company filings and press releases as well as interest in company crypto activities using Google Trends. They also applied established readability tests, such as the Flesch-Kincaid and Gunning Fog indexes, to the text in these disclosures to gauge how easy the copy was to understand.

What they discovered was revealing. During periods of bullish crypto prices, the firms made more disclosures about their crypto holdings. The language was also easier to read.

However, when crypto prices were in decline, companies mentioned crypto less frequently and the clarity of what they did say decreased.

In one filing, for example, Tesla placed information on their crypto holdings in a JPG file. JPGs are built for images, not text, which meant analysts’ automated readers might not have captured the words.

Tesla also grouped crypto losses under “restructuring and other” in financial statements. That, the researchers wrote, “arguably offers an opaque treatment … given that there is no clear connection between the operations of the company and its cryptocurrency investments.”

Overall, says Elitzur, “When things were going well, companies wanted to make it easier for readers to understand their message. But once we hit the crypto winter, this reversed, and they made it more difficult.”

The FASB has since issued accounting and disclosure standards for reporting crypto assets. That has reduced some of the grey areas. But broader lessons from the study remain.

First, investors should assume companies design their reports to spotlight good news and soften bad news. The practice is called impression management. “When things are good, they talk it up. When things are bad, they don’t.” Rotenberg says.

Second, the study highlights a subtler tactic: readability engineering. Firms can make positive news simple and direct while making negative information denser and harder to parse. Advances in artificial intelligence and other technologies can make it easier to detect readability engineering, Elitzur says.

The researchers argue that investors can counter with their own tools, including natural-language processing and readability analysis, to flag subtle shifts in tone and clarity. But even without such tech, investors should stay alert when reading disclosures by noticing what’s emphasized, what’s buried and what is difficult to understand.

“Whenever you read financial statements, you need to take a look at the story that the firm is telling,” Elitzur says. “Financial reporting is strategic. Realizing that can make you a better investor.”