Coinbase’s stock and bonds have been knocked by the collapse of FTX, which has sparked renewed concerns about the outlook for the US-listed cryptocurrency trading venue.
Over the past month, Coinbase’s bonds maturing in 2028 have tumbled by about a tenth in price, with investors demanding an elevated 14 per cent yield to purchase the debt. The bonds are now priced at 59 cents on the dollar, a big discount compared with 93 cents at the start of 2022.
“Given where the debt is trading, it would imply distressed valuations,” said John McClain, portfolio manager at Brandywine Global Investment Management, which owns Coinbase bonds.
The failure of Sam Bankman-Fried’s $32bn crypto exchange has also rattled Coinbase’s equity valuation, with its Nasdaq-listed shares plummeting by about a fifth over the past four weeks to change hands at just under $48 apiece, after a small uptick on Friday. Coinbase’s stock, which traded at almost $369 at the height of the crypto bull run last November, is down 81 per cent for the year to date.
Coinbase’s direct exposure to FTX is small — limited to just $15mn on deposit with the Bahamas-based exchange, according to the company, but the sharp falls highlight growing scepticism about the future of the crypto industry.
Moody’s Investors Service this week called FTX’s collapse a “credit negative” for Coinbase, saying its “implosion” would “radically transform the cryptoecosystem, further shaking trust and raising doubts around [the industry’s] ongoing prospects”.
The “shockwaves” created by FTX’s bankruptcy last month will hit Coinbase’s client engagement and trading volumes, Moody’s predicted in its report on Tuesday, threatening to weaken the company’s profitability even further.
A spokesperson for the exchange said Coinbase is in a “strong position”, adding it has no “meaningful exposure” to recent events.
Coinbase is highly dependent on revenues from trading, which have shrivelled as the prices of crypto tokens have slumped from an all-time high a year ago. The San Francisco company in June announced plans to cut a fifth of its then-workforce, amounting to more than 1,000 people. In the third quarter Coinbase posted a loss of $545mn, compared with a net profit of $406mn a year earlier.
Prices of popular coins slid even further after FTX’s rapid descent in November, with bitcoin tumbling to levels last seen in December 2020. Industry trading volumes also remained muted, according to data from The Block Crypto.
Coinbase’s current bond prices reflect “an apathy and a lack of appetite to own anything crypto related as a fixed-income investor”, said McClain at Brandywine. Shares in 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 with asset managers like myself, that say ‘if this thing goes wrong, I really don’t want to have my name associated with lending to Coinbase’,” McClain added.
However, with a cash pile of roughly $5bn as of September 30, the group’s “healthy liquidity should help it to weather the storm despite its recent weak financial results”, said Fadi Massih, vice-president at Moody’s financial institutions group.
“They do have the ability to weather the storm,” McClain concurred. “We think there are reasons to be interested in the debt,” he said.
“Now what we need to see from them, and what we’ve seen inklings of, is the ability to scale down their cost structure aggressively to match the new reality of where their business is.”
Coinbase “should be buying back every single bond that they possibly can”, McClain said, “given their balance sheet position, given the fact that leverage has decimated their competitors.”
“We believe [Coinbase] has a very strong cash position and may even capitalise on the FTX bankruptcy upheaval over the long term,” Richard Repetto at Piper Sandler wrote in a research note on Friday.
“Still, we believe a more aggressive headcount reduction is a prudent step in managing expenses and sustaining shareholder value in a potential extended ‘crypto winter’ that could result,” he added.
Moody’s added that Coinbase would benefit from being a publicly listed US company, “with a transparent organisation structure and governance framework”. In contrast, many of Coinbase’s offshore rivals have opaque structures and are racing to provide more transparency.
FTX’s collapse has left a “market share void”, Moody’s said. In the absence of fresh enthusiasm for crypto, that hole “will prove difficult to fill”, it added.