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Coinbase: crypto exchange’s fortunes remain tied to volatile bitcoin

Coinbase generated plenty of buzz in February with its Super Bowl TV ad. Dubbed “Less talk, more bitcoin”, the commercial featured a bouncing QR code offering new users $15 in free bitcoin.

The US-listed crypto exchange itself could do with less talking and more bitcoin trading. Rising interest rates have sent investors scrambling out of high-risk assets. A smaller user base and less trading volume resulted in a 27 per cent slide in first-quarter revenue, pushing the company into the red. Coinbase warned that trading volume would decline further in the current quarter.

Bad enough, but then Coinbase got yakking. An attempt by its founder and chief executive Brian Armstrong to clarify a new SEC disclosure requirement only further alarmed the market. Coinbase’s share price collapsed by more than a fifth on Wednesday. Its market valuation — which in November stood at more than $76bn — has shrunk to $12.5bn.

In a filing, Coinbase pointed out that, should it go bankrupt, any crypto assets held in its custody — worth $256bn at the end of March — could be subject to bankruptcy proceedings. As its users may be considered unsecured creditors, in a worst case, they could lose all their crypto assets parked with Coinbase.

This update follows new guidance from the SEC that requires crypto exchanges to treat any user’s cryptocurrency held by them as liabilities on their balance sheets.

With $6.1bn in cash and cash equivalents, Coinbase does seem flush with cash. Even so, Armstrong’s assertion on Twitter that the exchange had “no risk of bankruptcy” only highlighted a major weakness of Coinbase’s business. While bank accounts in the US come with deposit insurance offered by the Federal Deposit Insurance Corporation, crypto exchanges do not offer that same safety net.

Coinbase’s income very much depends on trading fees. Efforts to diversify its revenue stream will take time. A new marketplace for non-fungible tokens arrives just as that market is also slowing. Coinbase’s fortunes will thus continue to lurch around with volatile cryptocurrencies.



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