Is Coinbase Global at the risk of insolvency?

Is Coinbase Global at the risk of insolvency?

Lucknow(Coinchapter.com): Several cryptocurrency projects are struggling to stay afloat amid Bitcoin’s bear market crisis. Amid the chaos, certain rumors are now surfacing that Coinbase Global, a top cryptocurrency related firm, is at risk of insolvency.

Although the rumors stem from multiple factors relating to Coinbase’s financial health, many eyebrows were raised following CZ Binance’s now-deleted tweet. In the Tweet, the Binance CEO mulled if there were potential cracks in Coinbase’s reserves after pointing out that Coinbase Custody held $635K in Bitcoin for Grayscale while the exchange had only $600K of liquid capital.

Source: Twitter

Coinbase Global’s Financials – Fall from grace?

Although the deleted tweet is a possible retraction of his statements, there is more to the narrative than what meets the eye. To begin with, Bitcoin’s bull run, which stretched from 2020 to late 2021 was a golden patch for Coinbase Global. As customers flocked onto the platform, the U.S.-based firm noted a record $7.8 Billion in revenue during 2021, a massive 550% jump from a year ago. However, troubles began brewing following Bitcoin’s gradual downfall in late 2021.

During the second quarter of 2022, Coinbase’s revenue fell by 31% to $803 Million while its net loss rose to $1.1 Billion compared to a profit of $1.59 Billion from a year ago, the second quarterly net loss Coinbase has had cope with in the last 2 years.

The results of Coinbase’s receding financials are also evident from its stock market performance. Since its debut, the NASDAQ 500 listed firm has toughed an 83% drop in price. In the aftermath of the FTX fiasco, COIN fell to a record low of $40.61 on November 21, a 90% drop from its record high of $429.

Coinbase Global's Financials - Fall from grace?
Coinbase Global (COIN) Daily, Source: TradingView

Bond Prices decline while short interest rises

The lackluster financial performance has also attracted unwanted attention from short traders. As per Marketbeat, 17.2% of Coinbase Global’s floating shares are currently being shorted. The figure is eerily similar to GameStop’s, a stock that is well known for its short interest. A higher short interest suggests that investors have become more bearish on the price of an asset.

Bond Prices decline while short interest rises
Coinbase Global Short Interest Data, Source: Marketbeat

Elsewhere, the price of Coinbase Global’s bonds was trading at a massive discount to its par value. As of November 22, the bonds due 2031 traded at 51 cents compared to their August peak of $68.50. The yields, which are inversely related to price, hovered around 13.1%. In theory, higher bond yields contain a higher risk of default and show that investors are worried about the company’s ability to make interest payments.

To add fuel to fire, Reuters reported on Tuesday that credit ratings provider Moody’s had placed Coinbase’s corporate family rating, currently at Ba3, on review for downgrade. The news agency added that a rating of Baa3 and lower is considered “junk” territory and highly speculative and that Coinbase is rated one notch below.

Another market disaster waiting to happen?

So what are the repercussions of Coinbase’s financial condition? Social media user @GRDecter pointed out, the exchange currently holds over $95 billion in customer crypto assets and $6.5 billion in US dollars on behalf of its customers. This means that should the insolvency rumors turn out to be true, the crypto market could spiral into yet another crash.

Source: Twitter

She also directed attention to a well known short-sellers Jim Chanos, who said that Coinbase’s customer accounts are less valuable than they were a year ago. Chanos suggested that the lowered interest in crypto means people will trade less often and fewer trades and lower average transaction volume is bad news for Coinbase’s margins.

Co-founder and CEO Brian Armstrong intervenes

Amid speculation of Coinbase’s ability to mitigate another market disaster, Coinbase co-founder and CEO Brian Armstrong attempted to dispel such rumors. On November 21, he tweeted that the firm held $39.9 Billion worth of Bitcoins as of September 2022 and that the community should be wary of ‘false information.

Source: Twitter

Whether or not Armstrong’s comments will be taken as a sigh of relief or just measures to save a sinking ship remains to be seen. But what is known is that since he made the comments, Coinbase’s stock has recovered by over 10% in the past 48 hours.

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