Crypto

Wall Street Sours on Coinbase, Signaling Widespread Crypto Doubts

A year ago, cryptocurrencies were roaring and

Coinbase Global Inc.,

PIECE OF MONEY -0.08%

considered the Charles Schwab of crypto exchanges, had just come out of an IPO which valued the company at $85 billion. Today, a market-based gauge suggests investors doubt the company’s survival.

As a publicly traded entity, the US company, which hails from San Francisco but says it has no head office, seems to have avoided the complex financial maneuvers which helped bring down FTX, a competitor whose stunning collapse shook a already faltering industry. However,

Coinbase

PIECE OF MONEY -0.08%

burns its cash and loses investor confidence. Its shares have fallen 81% since the start of the year, its market capitalization has fallen to $11 billion and its bonds are trading at just over half their face value.

The declines raise questions about the future of digital currencies and the businesses attached to them.

Issued in September 2021 — when bitcoin was trading at nearly triple its current price — Coinbase’s 3.375% debentures due in 2028 changed hands Thursday at around 56 cents on the dollar, according to MarketAxess. One interpretation, analysts say, is that investors think it’s pretty much unclear whether Coinbase is repaying its debt in full or losing so much value that it sticks bondholders with large losses in the event of bankruptcy.

Coinbase representatives declined to comment for this article.

By all accounts, Coinbase stands out in the crypto world for its transparency and relatively stable business model, which relies on taking a small portion of the transactions that occur on its platform. For many, it is difficult to envision a crypto industry without Coinbase. But it’s also becoming increasingly hard to believe that the future of crypto looks like anything close to its prosperous past, with higher interest rates, crypto prices hovering around multi-year lows, and FTX customers wondering if they will ever get their repayment.

“If this thing sticks around for some reason – these crypto tokens – then they are definitely one of the top providers in the United States for this,” said Dan Dolev, senior equity analyst who covers Coinbase at Mizuho Securities USA. But, he added, “the problem is the inherent industry in which they operate.”

Even at this difficult time, Coinbase’s share price reflects some chance that the company will be a highly profitable leader of the digital future, as equity investors, as owners of the company, would participate in this. hit.

In contrast, bond prices are largely unaffected by best-case scenarios, because all that matters to debt investors is that a company is able to repay its interest and principal.

One argument made by Coinbase bondholders is that analysts should look at Coinbase bond yields rather than their prices.

Because interest rate have climbed so high this year, even some high quality corporate bonds with low annual interest rates are trading at significant discounts at par. Otherwise, they would offer lower yields than US Treasuries.

Yet, according to MarketAxess, Coinbase’s 2028 bonds traded on Thursday with a yield of around 15%, or 11 percentage points more than comparable US Treasuries.

Coinbase’s 2028 bonds traded Thursday with a yield of around 15%, according to MarketAxess.


Photo:

Michael Nagle/Bloomberg News

A Treasury gap of at least 10 percentage points is widely considered a sign of financial stress. From 1996 to 2021, bonds in this category had a 38% chance of defaulting within 12 months, according to Marty Fridson, a veteran high-yield bond analyst who is chief investment officer of Lehmann Livian Fridson Advisors.

Coinbase’s war chest is one reason to believe it has plenty of time to prove itself, some investors and analysts say.

The company had $5 billion in cash and cash equivalents as of September 30, largely due to its pre-2022 success and timely bond sales last year, which raised billions of dollars at a cost minimal. Its nearest major debt maturity, assuming it doesn’t convert to equity, is a $1.4 billion issue of convertible notes that isn’t due until 2026. Its $2 billion in unsecured conventional bonds, maturing in 2028 and 2031, actually comprise all of its remaining indebtedness.

Cryptocurrency exchange FTX was considered a survivor in a struggling industry, but within six days the exchange crashed due to a sudden liquidity crunch. WSJ explains the factors that led to FTX’s growth and what led to its downfall. Illustration: Alexandra Larkin

The big question, however, is the sustainability of the business. Last quarter, Coinbase spent $278 million in cash, according to S&P Global Market Intelligence. That happened even though it saved $391 million in cash expenses by paying employees with stock — an unsustainable amount, some investors say, given the company’s declining stock price.

Bond investors who believe in Coinbase say the company could easily cut costs by reducing spending in ancillary business areas, such as non-fungible tokens or NFTs. For them, it is good news that the company already laying off employeesafter a wave of hiring last year.

Ultimately, however, Coinbase’s business is highly dependent on the price of digital currencies in general and bitcoin in particular, which accounts for over 40% of its customers’ crypto assets.

The company charges a fee of around 1% on trades from individual investors and a much lower rate for institutional investors. This means that when the price of bitcoin drops, it gets less revenue for each bitcoin traded. In addition to that, trading volume may decrease as bitcoin prices plummet, dealing a double blow to the business.

There are also regulatory risks. Securities and Exchange Commission Chairman Gary Gensler said most crypto tokens should be considered titles. If widely enforced, this designation could force Coinbase to freeze trading in tokens that make up at least 30% of its customers’ crypto assets, according to some analysts’ estimates.

Opinions on Coinbase therefore tend to be divided between those who see a future for cryptocurrencies and those who do not.

“Investors have always wanted an alternative to the conventional monetary system,” said Bill Zox, high-yield bond portfolio manager at Brandywine Global, which holds Coinbase bonds. Crypto, he said, is similar to gold and better in some ways.

With Coinbase bonds trading at such low levels, Zox added that it would be wise for the company to buy back all of its debt at prices close to current prices. Such a move, he said, would boost investor confidence while leaving him with billions of dollars in cash.

Paul Vigna contributed to this article.

Write to Sam Goldfarb at [email protected]

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