Digital Platform Coinbase Nears All-Time Low in Wake of FTX Collapse, Where to for COIN?

Digital banking platform Coinbase has had quite the traumatic experience since it went public last year. Trading under the symbol $COIN, shares of Coinbase Global, on Wednesday touched near all-time lows as Bitcoin nears two-year lows. The surprising collapse of billionaire Sam Bankman-Fried’s FTX exchange continued to reverberate around cryptocurrencies from FTX’s liquidity crunch. The collapse opened Pandora’s box with the Binance-FTX deal as more dominoes fall over with liquidations. A federal probe into FTX’s actions reportedly is underway.

Coinbase Phone

Digital currencies had already collapsed from all-time highs, hundreds of billions of dollars in market value have been wiped out. Bitcoin, the largest token by market value, fell as much as 11% to $16,705 on Wednesday, the lowest price since November 2020. That brings this week decline to about 20%. It reached a record high of almost $69,000 a year ago.

Source: WSJ

Stock Market Reaction

Coinbase Global Inc – Class A

52wk High 355.20 52wk Low 40.83

  • $45.74 -5.09 (10.01%) today lunchtime
  • $45.74 -13.63 (22.96%) last 5 days
  • $45.74 -205.31 (81.78%) YTD
  • $45.74 -311.65 (87.20%) one year

COIN has faced SEC probes into whether it improperly let Americans trade digital assets that should have been registered as securities and alleged insider trading scheme that saw former Coinbase manager and two other people. sued by the regulator.

SEC Chair Gary Gensler has gone after trading platforms and argued that they should do more to protect retail investors. Coinbase is the largest US trading platform with more than 150 tokens. If those products were deemed securities, the firm could need to register as an exchange with the SEC.

FTX Collapse Key Facts

  • Bitcoin fell as much as 11% to $16,705 on Wednesday, the least since November 2020., its lowest price since November 2020, following a 10% drop Tuesday after the largest crypto exchange Binance announced a nonbinding agreement to buy its rival FTX due to dire liquidity issues at Bankman-Fried’s firm.
  • The letter of acquisition intent by Zhao’s Binance Holdings followed a bitter feud between with Bankman-Fried spilled into the open. Zhao actively undermined confidence in FTX’s finances, helping spark an exodus of users from the three-year-old exchange.
  • Binance Chief Executive Officer Changpeng “CZ” Zhao had stunned the crypto world on Tuesday with an announcement that his firm was moving to take over, which suffered a liquidity crunch after Zhao announced that he was selling a $530 million holding of FTX’s native token.
  • Report Binance CEO Changpeng Zhao that the FTX saga “severely” shook confidence in the industry and an anonymously sourced Coindesk report that Binance is considering backing out of its FTX agreement.
  • Other digital assets sank, with the second-largest token ethereum falling 9% Wednesday and down nearly 30% from a week ago, while FTX’s FTT, the utility token of the FTX exchange, collapsed by more than 40%, following a more-than-70% tumble on Tuesday.
  • Crypto stocks sunk, with exchange Coinbase falling 9% Wednesday for a two-day 18% loss dangerously close to an all-time low, and Bernstein analysts called the dip a result of a “seismic shift” in the industry.
  • Bloomberg reporting late Wednesday morning that the Securities and Exchange Commission is investigating whether FTX broke the law in handling customer withdrawal requests earlier this week.

Bankman-Fried Background

  • Bankman-Fried was worth as much as $26.5 billion, according to estimates earlier this year, and built his Bahamas-based exchange to a $32 billion valuation in January.
  • Bankman-Fried needing rescue was a major role reversal for the low-key 30-year-old crypto baron, previously offering hundreds of millions in revolving credit to ailing crypto lenders BlockFi and Voyager Digital.
  • FTX’s collapse apparently came out of nowhere even to Bankman-Fried, who refused to rule out an FTX acquisition of Binance at last week’s Forbes Iconoclast Summit.

The FTX Fallout

Aside from the obvious in the crypto space and regulatory issues going ahead there are the sponsorship and donations FTX used to gain influence:

  • FTX has spent millions on advertising, largely focused on sports-related advertising to reach its primarily young male target market, becoming the named sponsor of the NBA’s Miami Heat’s arena and striking deals with star athletes like Tom Brady and Stephen Curry.
  • “This could be a seismic moment for the sports sponsorship industry,” GlobalData analyst Conrad Wiacek, said in a Wednesday note, projecting “further turbulence” after crypto spent more than $3 billion in sports sponsorship since early 2021.
  • Bankman-Fried was the second largest donor to the Democrate party, after George Soros. Ironically this all unfolded on the day of US midterm elections.
  • Bankman-Fried’s 53% stake in FTX was worth about $6.2 billion before Tuesday’s takeover, according to the Bloomberg Billionaires Index, based on that fundraising round and the subsequent performance of publicly traded crypto companies. 
  • Bankman-Fried’s most valuable asset was his crypto trading house, Alameda Research, which contributed $7.4 billion to his personal fortune.
  • In May that he had acquired a 7.6% stake in Robinhood. Shares of the online brokerage fell 19% on Tuesday after Binance agreed to acquire FTX and were down an additional 5% at 9:39 a.m. in New York.
  • The Bloomberg wealth index assumes existing FTX investors, including Bankman-Fried, will be completely wiped out by Binance’s bailout, and that the root of the exchange’s problems stemmed from Alameda. As a result, both FTX and Alameda are given a $1 value.
  • SBF’s net worth at about $1 billion, down from $15.6 billion heading into Tuesday. The 94% loss is the biggest one-day collapse ever among billionaires tracked by Bloomberg.
  • Changpeng Zhao’s Binance or CZ now looks poised to add FTX to his own empire. He is already the richest person in crypto, with a fortune estimated at $16.4 billion. His net worth peaked at $97 billion in January, according to the Bloomberg wealth index.

Solana Collapse

The native token of the Solana blockchain, Sol has also collapsed. Sol is associated with both FTX and Bankman-Fried’s crypto trading house Alameda Research. Sol was down as much as 36% on Wednesday, taking losses this year to 90%.

“SBF and FTX were the biggest patrons of Solana,” Teng Yan, a researcher at digital-asset research firm Delphi Digital, said on Twitter. “This era is over. Binance has taken over, and they will heavily favor BNB chain over Solana. Alameda had ~$1B in locked and unlocked $SOL, which they’ll have to sell if insolvent. This puts a huge sell pressure on $SOL.”

Confidence shattered for Crypto

Noelle Acheson, author of the “Crypto is Macro Now” newsletter, pointed out that Bitcoin, which typically holds up better than other tokens during times of stress, was seeing greater declines than some other altcoins. That potentially points to institutional investors bailing “as a result of the drama.”

“It’s a sign that this is a blow to confidence in the industry as a whole, from the investor’s point of view,” she said in an interview. “From the industry’s point of view, it’s also a pretty steep blow, much more so than what we saw with Three Arrows Capital and with the Terra implosion. This is sitting harder.”

Coinbase already has its Legal problems

On July 21 the SEC accused one of the company’s former employees of violating its insider-trading rules by leaking information to help his brother and a friend buy tokens just before they were listed on the platform. The SEC said it had determined that nine of the dozens of digital tokens the men traded were securities, including seven the exchange says it lists. Federal prosecutors in Manhattan also charged the three men with wire fraud conspiracy and wire fraud. 

In response, Coinbase put out an entry on its blog titled: “Coinbase does not list securities. End of story.” Coinbase Chief Legal Officer Paul Grewal said the Justice Department chose not to file securities fraud charges, despite reviewing the same facts as the SEC. He also said that before listing tokens, Coinbase analyzes whether an asset could be considered a security and “also considers regulatory compliance and information security aspects of the asset.”

In its first-quarter earnings report Coinbase said it had “received investigative subpoenas from the SEC for documents and information about certain customer programs, operations, and intended future products, including the company’s stablecoin and yield-generating products.”

Bloomberg said that to decide if a digital asset is a security, the SEC applies a legal test, which comes from a 1946 US Supreme Court decision. Under that framework, the agency considers a token generally to be under SEC purview when it involves investors kicking in money to fund a company with the intention of profiting from the efforts of the organization’s leadership.

Coinbase IPO

Digital banking platform Coinbase went public last year trading under the symbol $COIN. The Nasdaq’s first major direct listing rose as high as $429.54 briefly giving it a market value over $100 billion. Growing popularity of cryptocurrencies has seen attention shift towards the exchanges they trade on.

Coinbase debuts on the NASADQ – COIN Day One

  • Coinbase’s market cap exceeded $100 billion onr its debut at the peak of $429.54
  • Nasdaq provided a reference price late Tuesday of $250, but as a direct listing no shares changed hands at that price.
  • Coinbase has soared in value in the past year alongside bitcoin and ethereum, which account for most of the volume on the site.

Coinbase Debut’s In what turned out to be extremely volatile day Coinbase opened at $381 a share, up 52% from its reference price of $250. soared to $429.54, fell back to a low of 310 and closed the first day at $328.28. Not for the faint of heart.

COIN Day 1

Comments on the debut via CNBC

Sarah Kunst, managing director of Cleo Capital, explains the significance of the debut.

“The thing that is not debatable is that this is a huge success story for crypto overall, and what we’re seeing here is the first major IPO, the first IPO ever really, for a crypto company, for a crypto exchange in the U.S. And I think that no matter what happens with their stock price minute to minute or over the next few quarters, this milestone is the first of many and crypto companies are here to stay even in the public markets.” ‘

Michael Bucella, partner at BlockTower Capital, mentions one tailwind boosting Coinbase.

“There is enormous operating leverage within Coinbase. If you think about their fee revenue model, it’s primarily crypto-driven, so fees are collected in crypto. So you had an acceleration increase in fees, plus the acceleration in price gives you this almost levered beta to this space.”

Emily Parker, TV co-anchor at CoinDesk, highlights some challenges Coinbase could face.

“It’s hugely important for the crypto industry, and that’s why this listing is so important, because Coinbase in many ways is seen as a gateway to the mainstream world. Coinbase is relatively easy to use, it’s trusted, so it’s for new investors who want to get into the crypto market. But … that could actually be a risk to Coinbase over the long term because Coinbase is going to start seeing more competition from banks. If there is an ETF, will that pose a risk to Coinbase? If a bank allows you to start buying crypto out of your checking account, will people still use Coinbase? So interestingly as crypto gets more and more mainstream, Coinbase will have to maintain that first-mover advantage.”

Bobby Cho, partner at CMS Holdings, sees opportunity ahead for Coinbase.

“There’s this opportunity for Coinbase to access all different types of traditional products. Two years ago, I believe, they bought Keystone, a broker dealer, so that’s in the works, and there are other ways that they haven’t even tapped into in terms of monetizing how current exchanges … are currently making money, such as market data. At this point, market data is free, but at some point they’re going to start to latch on to some of those revenue streams, and I just look at all of that as a growth opportunity here.”

About Coinbase

The company operates a platform that allows individuals and institutions to trade Bitcoin and over 45 other crypto assets.

The company saw explosive growth in the 4Q20, as did bitcoin soaring well past $50,000 from around $2000. The company has 56m verified users and its latest results showed the company turned over $1.8bn in the first three months of its fiscal year. Coinbase and its revenue is directly tied to cryptocurrency transactions, which have fluctuated violently historically as have the underlying cryptocurrencies.

Coinbase’s last formal valuation came in 2018 when it received $300 million in E-series funding and was reportedly worth $8 billion. It is uncertain what the price of COIN shares will be upon their direct listing. Sales on the Nasdaq Private Market have reached as high as $375 per share.

In its most recent quarterly update Coinbase announced that it expects to make between $730m to $800m in Q1. For the whole of 2020 it generated revenue of $1.3bn. Trading volume for the last quarter was over $335bn, with assets on its platform rising to $223bn, including $122bn from what they called “institutional” users. Coinbase didn’t provide any guidance, citing the “inherent unpredictability” of its business.

On April 6, the company released stunning preliminary results for Q1, highlighted by 844% yr/yr revenue growth to $1.8 bln. Underlying the soaring top-line growth was a sharp increase in Monthly Transacting Users (MTUs) to 6.1 mln from 2.8 mln for the year ended December 31, 2020. 

COIN’s conservatively forecast for FY21 called for MTUs of 5.5 mln, indicating a slowdown from recent trends. Even for COIN’s best case scenario, MTU’s are only forecasted to increase to 7.0 mln from the current 6.1 mln level.

The company did outline three separate scenarios for the year, with the most optimistic predicting around 7m monthly users, which is slightly higher from its current 6.1m monthly transacting users. As a result of the direct listing the company expects to incur expenses of $35m in Q2.

How Coinbase Makes Money

When someone completes a transaction on Coinbase, they pay fees for the privilege of using the service.

One of these is the Coinbase fee. This is either a flat rate or a variable percentage. It is based on the user’s region, product feature and payment type. Coinbase’s other fee is the margin or spread of up to 2.00% of the transaction. This is added to the exchange rate on Coinbase Pro — the trading platform tied to Coinbase where all orders are fulfilled. Coinbase also has a few other revenue streams that continue to grow over time:

  • Coinbase Pro: A platform that enables users to trade directly on the Coinbase exchange that backs their Coinbase transactions
  • Coinbase Commerce: A software-as-a-service product that provides payment processing for online merchants
  • Coinbase Card: A physical Visa debit card that converts cryptocurrency to U.S. dollars, enabling users to make purchases anywhere Visa cards are accepted USD Coin (USDC): A cryptocurrency offered by Coinbase with a value tied directly to the U.S. dollar whereby there is always a 1-to-1 relationship between the two,

Sources: TC, Bloomberg, WSJ

From The TradersCommunity Research Desk