valuation was expected to be the largest by a U.S. tech company since Facebook went public. (STRF/STAR MAX/IPx 2021 2/26/21)
Coinbase, the largest U.S. cryptocurrency exchange, reported a 40-percent drop in trading volume in the first quarter of 2022 as “crypto winter” set in, with revenue down 35 percent year over year and losses that exceeded analyst expectations.
The company reported net losses of $430 million, far more than the $47 million Wall Street analysts expected. Revenues — most of it from trading fees — fell 35 percent to $1.2 billion year over year. Analysts expected $1.5 billion.
Buried in Coinbase’s Q1 earnings report was an update that said its users could lose all the cryptocurrency stored in their accounts if the exchange goes bankrupt. This was more bad news that could have helped send the company’s stock, already down 71 percent on the year, plummeting another 25 percent on Wednesday, May 11.
Coinbase share prices are down 83 percent from their November 2021 all-time high of $368.90, when Bitcoin’s price also peaked at $67,802.30 per coin.
“The stock is trading as if COIN will burn through all of its cash and then become insolvent,” BTIG analyst Mark Palmer wrote in a note.
Coinbase made no apologies for its quarterly loss of $430 million and a 19 percent drop in monthly users, blaming its disappointing Q1 results on falling crypto prices and volatility.
“This doesn’t faze us, because we’ve always taken a long-term perspective on crypto adoption …We are looking for long-term investors who believe in our mission and will hold through price cycles,” the company said in its shareholder letter.
Dan Dolev, an analyst at Tokyo-based financial services firm Mizuho, predicted “crypto winter” was on its way, arguing in a May 4 note that Coinbase’s April and May trading volumes suggested revenue would be 30 percent lower than expectations. “Crypto winter has come early, and temperatures are dropping fast,“ he wrote.
In a filing late Tuesday, Coinbase included a “new risk factor” based on the recent Securities and Exchange Commission requirement for public companies that hold crypto assets for third parties.
“The crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors,” Coinbase wrote in the filing.
CryptoWhale, a source for Crypto Insights, responded on Twitter: “In other words, when they eventually go bankrupt, they will use YOUR crypto to bail themselves out.”
Coinbase Global Inc. CEO Brian Armstrong tried to play down bankruptcy concerns in a Twitter thread after the earnings call. “We have no risk of bankruptcy,” he tweeted, with a link to a Securities & Exchange Commission (SEC) bulletin.
“We believe our Prime and Custody customers have strong legal protections in their terms of service that protects their assets, even in a black swan event like this,” Armstrong wrote. “For our retail customers, we’re taking further steps to update our user terms such that we offer the same protections to those customers in a black swan event. We should have had these in place previously, so let me apologize for that.”
Mathematician and author Nicholas Taleb is credited with coining the phrase “black swan” to mean an unpredictable, rare, and catastrophic event. An academic researcher, professor and former derivatives trader, Taleb taught for 12 years at New York University School of Engineering. His work concerns randomness, probability, and uncertainty.
In his 2007 bestseller, “The Black Swan,” Taleb wrote about highly improbable events and their potential to cause catastrophic consequences. A one-time admirer-turned-detractor of Bitcoin, Taleb has denounced the world’s No. 1 cryptocurrency as a gimmick that resembles a Ponzi scheme.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?
“An individual’s ownership of cryptocurrency is supposed to be immutable and absolute; that’s one of the key selling points touted by blockchain evangelists everywhere,” Nicholas Gordon wrote for Fortune. “But when a user creates a Coinbase account, they often end up storing their cryptocurrency in a wallet controlled by Coinbase, which means the individual is giving away at least part of their control over their own funds.”
By admitting that crypto assets in a blockchain-based exchange aren’t secure in the event of a bankruptcy, Coinbase draws attention to the benefits of keeping cash with traditional banks. U.S. bank accounts are protected by the Federal Deposit Insurance Corporation (FDIC). If a bank fails, the FDIC protects deposits up to $250,000.
BTIG’s Palmer argued that Coinbase insolvency concerns are overblown.
“We believe the market is pricing in an outcome for COIN that (1) fails to reflect the company’s ample liquid assets, including $6.1 billion of cash and ~$1bn in crypto held for investment, with the cash alone equal to almost one-third of the stock’s market capitalization at today’s market close, and (2) ignores its established leadership within the digital asset space and its multiple avenues for growth, including the adoption of its institutional crypto prime brokerage platform, the growth of its recently launched NFT marketplace, and the potential upside from its staking offering,” Palmer wrote.
Photo: Coinbase logo photographed on an iPhone ahead of its public listing on the Nasdaq. The Coinbase IPO valuation was expected to be the largest by a U.S. tech company since Facebook went public. (STRF/STAR MAX/IPx 2021 2/26/21)
