Coinbase’s stocks and bonds were hurt by the collapse of FTX, which has sparked renewed concerns about the prospects for the US-listed cryptocurrency exchange.
Over the past month, Coinbase’s 2028-due bonds have fallen about a tenth in price, with investors demanding an elevated 14 percent yield on purchases of the debt. The bonds are now priced at 59 cents against the dollar, a large discount from 93 cents at the start of 2022.
“Given where the debt is trading, that would indicate distressed valuations,” said John McClain, portfolio manager at Brandywine Global Investment Management, which owns Coinbase bonds.
The failure of Sam Bankman-Fried’s $32 billion crypto exchange has also rocked Coinbase’s stock valuation, with Nasdaq-listed shares plummeting about a fifth over the past four weeks and trading at just under 48 after a small rise on Friday dollars a piece changed hands. Coinbase stock, which was trading at nearly $369 at the peak of the crypto bull run last November, is down 81 percent year-to-date.
Coinbase’s direct exposure to FTX is small – at just $15M, according to the company.
Moody’s Investors Service this week called FTX’s collapse a “credit negative” for Coinbase, saying its “implosion” would “radically transform the crypto ecosystem, further shaking confidence and raising doubts.” [the industry’s] ongoing perspectives”.
The “shockwaves” triggered by FTX’s bankruptcy last month will hit Coinbase’s customer engagement and trading volume, Moody’s predicted in its Tuesday report, threatening to further weaken the company’s profitability.
A spokesman for the exchange said Coinbase is in a “strong position,” adding that it does not have “significant exposure” to recent events.
Coinbase is highly dependent on trading revenue, which has shrunk as crypto token prices plummeted from an all-time high a year ago. The San Francisco-based company announced plans in June to cut a fifth of its then workforce, equivalent to more than 1,000 employees. In the third quarter, Coinbase posted a loss of $545 million compared to a net income of $406 million a year earlier.
Popular coin prices tumbled even further after FTX’s rapid plunge in November, with Bitcoin plunging to levels last seen in December 2020. Industry trading volumes also remained subdued, according to data from The Block Crypto.
Coinbase’s current bond prices reflect “an apathy and lack of appetite to own anything crypto as a fixed income investor,” Brandywine’s McClain said. Shares of other crypto-focused groups like Bitcoin investor MicroStrategy and investment firm Galaxy Digital have also fallen sharply in recent weeks.
“I think there’s a lot of headline risk with Coinbase and money managers like me saying, ‘If this thing goes wrong, I really don’t want my name associated with lending to Coinbase,'” McClain added .
With cash on hand at about $5 billion as of Sept. 30, the group’s “healthy liquidity should help it weather the storm despite its recent weak financial results,” said Fadi Massih, vice president of Moody’s financial institutions group.
“You have the ability to weather the storm,” agreed McClain. “We believe there are reasons to be interested in the debt,” he said.
“What we need to see from them now, and what we’ve seen hints of, is the ability to aggressively lower their cost structure to align with the new reality of their business.”
Coinbase “should be buying every single bond that it can,” McClain said, “given their balance sheet position, given that leverage has decimated their peers.”
“We believe [Coinbase] has a very strong cash position and could even benefit from the FTX bankruptcy upheaval over the long term,” Piper Sandler’s Richard Repetto wrote in a research note on Friday.
“Nonetheless, we believe more aggressive staff reductions are a prudent move to manage spending and preserve shareholder value in a potentially prolonged ‘crypto winter’ that may ensue,” he added.
Moody’s added that Coinbase would benefit from being a publicly traded US company “with a transparent organizational structure and governance framework.” In contrast, many of Coinbase’s offshore competitors have opaque structures and are rushing for more transparency.
FTX’s collapse has left a “market share gap,” Moody’s said. In the absence of renewed enthusiasm for crypto, this hole will “prove difficult to fill,” he added.