A year ago, the cryptocurrency industry was on the rise, and only Coinbase Global Inc. went public. was valued at $85 billion. Since then, there have been many events that have put the digital asset market in a precarious position. As for Coinbase, which operates the crypto exchange of the same name, investors began to doubt the company’s ability to survive in this situation.
Coinbase is a public company whose shares are traded on an exchange. It looks like it has managed to avoid the turmoil following the recent collapse of its rival crypto exchange FTX. However, Coinbase’s capitalization has steadily declined along with investor confidence. Since the beginning of the year, the company’s share price has fallen 81%, and its market cap has fallen to $11 billion.
This decline raises questions about the future of digital currencies and related businesses. Coinbase’s September 2021 3.375% unsecured bond due 2028 traded at $0.57 per dollar this week, according to MarketAxess. Analysts say that one interpretation of this fact is that investors think it’s roughly settled whether Coinbase will pay off its debt in full or lose so much money that bondholders will suffer big losses from the company’s bankruptcy. Company officials declined to comment on the matter.
Throughout Coinbase’s existence, there has been an industry perception that the company operates a relatively transparent business based on taking a small percentage of the transactions made on its platform. It is difficult for many to imagine the cryptocurrency industry without Coinbase, but it is becoming increasingly difficult to believe that the future of the digital asset market will be as prosperous as the past. Interest rates are rising, the value of cryptocurrencies has hit a multi-year low, and clients of bankrupt players like FTX are wondering if they can get their money back.
Even in this challenging environment, Coinbase’s stock price reflects the likelihood that the company can become highly profitable in the future, which could bode well for investors and business owners. At the same time, all that matters to investors in debt securities is that the company is able to pay interest and principal on the debt. Coinbase’s 2028-maturity bonds traded at 14.6% this week, which is 10.7 percentage points higher than comparable U.S. Treasuries, according to MarketAxess.
According to some investors and analysts, Coinbase’s cash flow is one reason the company has had time to prove its worth. As of September 30, the company had $5 billion in cash and cash equivalents, largely due to Coinbase’s success over the past few years. The company’s principal debt, unless converted into stock, is scheduled to issue a $1.4 billion convertible bond maturing in 2026. $2 billion in unsecured notes maturing in 2028 and 2031 effectively make up the company’s entire remaining debt load.
The big question, however, is the sustainability of Coinbase’s business. Coinbase reported a $278 million loss last quarter, according to S&P Market Intelligence, even as the company saved $391 million in expenses by paying employees to stock. Bond investors say Coinbase can easily reduce costs on non-fungible NFTs, for example. Also, good news for them is that the company has started downsizing.
Ultimately, Coinbase’s business depends heavily on the value of cryptocurrencies in general and Bitcoin in particular. This is due to the fact that Bitcoin accounts for more than 40% of the company’s clients’ cryptocurrency assets. The platform charges a 1% commission on trading from retail investors and offers a much lower rate for institutional investors. This means that as Bitcoin depreciates, so will the company’s revenues. Moreover, as the exchange rate falls, the trading volume may also decrease, which will deal an additional blow to the business.
There are other risks too. The US Securities and Exchange Commission has long argued that many cryptocurrency tokens should be considered securities. If the regulator approves this rule, analysts say Coinbase will have to freeze trading in tokens that make up at least 30% of the company’s customers’ crypto assets.