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Key takeaways
The last few months have seen the bankruptcies of crypto heavyweights Celsius, Three Arrows Capital (3AC) and Voyager, as well the total collapse of large cap cryptocurrency Terra Luna and the linked TerraUSD.
So, is Coinbase next?
That’s the question some are beginning to ask, with rumors of a Coinbase insolvency starting to pick up steam. Like everyone else in the industry, Coinbase has come under pressure in 2022 due to the crash in cryptocurrency markets.
It’s not something they’ve shied away from, with CEO Brian Armstrong announcing in June that the company would be laying off 18% of its workforce. In a post on the Coinbase blog, Armstrong stated that he felt a recession was likely and that a crypto winter was here.
These challenges aren’t unique to Coinbase, however the way they need to deal with them is. That’s because unlike Celsius, 3AC, Voyager and most other companies in the crypto space, Coinbase is a public company.
They’re listed on the NASDAQ, which means they report to the SEC and have a lot more T’s to cross and I’s to dot than most other crypto businesses. So with a volatile market and liquidity problems across the industry, should Coinbase investors be nervous?
Unless you’ve been living off the grid in the Himalayas for the past year, you’ll know that the crypto market has crashed throughout 2022. Bitcoin is down over 40%, Ethereum is down over 50% and many other coins and tokens are down even more.
These massive falls have created big liquidity problems for companies who have been built to use crypto as collateral and working capital. 3AC was the first big domino to fall. The crypto hedge fund, which at one time managed up to $10 billion in assets, was put into liquidation by a court in the British Virgin Islands after failing to meet margin calls.
3AC borrowed money from a lot of different places, and their bankruptcy caused a contagion effect to other companies, notably crypto lender Voyager Digital who were owed $670 million. 3AC’s default on this debt forced Voyager themselves into Chapter 11 bankruptcy.
Other companies that were hit by the collapse of 3AC include Genesis, BitMEX, Blockfi and FTX.
It’s a similar story for DeFi platform Celsius, who halted all withdrawals and transfers on the platform on the 12th June. Speculation ran wild about what this would mean for depositors, with these fears confirmed when Celsius announced they’re filing for Chapter 11 Bankruptcy earlier this week.
These problems are being caused by a couple of different factors. The first is simply that the company balance sheets have been hammered due to the falling crypto prices. The second is liquidity problems, with customers looking to pull their money out of crypto into safer assets as a result of extremely high levels of volatility.
Even for companies who are well capitalized and with strong cash reserves, the market environment has been making things difficult and Coinbase isn’t the only crypto company to be laying off staff. Gemini has announced a reduction in headcount of 10%, BlockFi by 20%, Crypto.com by 5% and NFT marketplace OpenSea is also cutting 20% of their employees.
All of this has wreaked havoc on the Coinbase stock price, which is down over 70% so far this year. But it’s recent cost cutting moves by the company that have kicked the rumor mill into overdrive.
Coinbase appears to be focusing heavily on reducing costs right now. The layoffs are the most obvious example, however they also announced in June that they would be shutting down Coinbase Pro, an advanced platform designed for professional and high volume traders.
The move would see existing users transitioned onto the standard Coinbase platform, which has been bolstered with advanced features in a bid to capture a wider segment of the market. In isolation this seems like a fairly sensible move, but when combined with the other changes being made, it’s clear that Coinbase is searching hard for ways to reduce overhead.
The big news this week, however, is that Coinbase has suspended their affiliate program in the U.S.
Affiliate programs are a common marketing strategy used by almost every industry in the world and it’s one of the main sources of income for content creators and influencers. The programs work by providing content creators with a unique link, which they can then include in their content.
When someone uses the link to sign up for a service or buy a product, the creator is paid a commission or a fee for referring the customer to the business.
Financial industry affiliate programs can be particularly lucrative for content creators. As recently as early 2022, Coinbase affiliates were being paid up to $40 for every new sign up they generated through their content.
As part of their recent cost cutting measures, Coinbase slashed the commission on new sign ups in April, dropping them from $40 down to as low as $2 before suspending the program altogether this week.
Affiliate programs can be a really effective way to get new customers, but in an environment where prices are down and volatility is high, these new customers may not be as active as those acquired during a bull market. Given that it costs Coinbase real cash in affiliate commission each time they add a new customer, they’ve decided that, for the time being at least, this cost needs to go.
Coinbase has said that they plan to bring the program back in 2023, but they’ve not given a concrete date for exactly when they expect it to be reinstated.
Some commentators have signaled this decision as a ‘big red flag’ and raised concerns about the future of Coinbase. It’s reasonable for investors to be wary of a company who operates in the notoriously volatile crypto industry, at a time when prices have crashed. However there is a big difference between Coinbase and the other big names that have recently gone bust.
Coinbase is a publicly listed company, which means from a financial standpoint, they’re an open book. There are strict disclosure requirements for public companies, which means that investors can see the financial health of the business down to the penny.
This is very different to the situation with 3AC, Celsius and Voyager Digital. These companies have no disclosure requirements. Customers have no way to know the financial health of the company, and the individuals running them have no obligations to provide any details or context on the health of the business.
Looking at Coinbase’s financials as at the end of March 2022, there are a number of details worth pointing out. First is that the company currently has over $6 billion in cash on hand and net income of $2.4 billion over the previous 12 months. This income figure is down from the previous quarter, which is to be expected given that trading volumes have fallen significantly since the end of 2021.
In isolation those figures don’t give investors much of an idea of how financially secure Coinbase is, but it’s possible to use the figures provided to apply financial ratios which are designed to assess the financial health of a company.
The current ratio looks at a company’s ability to pay its short term debts with its easily accessible assets, like cash. If a company has a current ratio of less than 1.00, it means they don’t have enough liquid assets to clear their debts, and if they have a ratio above 1.00 then it means they have enough to remain solvent over the short term.
Currently, Coinbase has a current ratio of 1.6 which would suggest that they are in a comfortable position in relation to their short term debt and assets. This isn’t the whole picture, as it’s simply a snapshot of the short term financial obligations of the company.
For a longer term measure of the solvency of a company, looking at the debt to equity ratio can provide a guide on the debt load of the business. Generally speaking, a debt to equity ratio of below 1.00 would be considered fairly safe, as it means that for every $1 of equity there is less than $1 of debt.
The acceptable range is different across industries, but currently Coinbase’s debt to equity ratio is around 0.63.
To provide some context to these figures, trading platform Robinhood currently has a current ratio of 1.4 and a debt to equity ratio of 0.32. Payment platform Block (previously Square) has a current ratio of 2.00 and a debt to equity ratio of 0.29. PayPal PYPL has a current ratio of 1.2 and a debt to equity ratio of 0.48.
All in all, Coinbase currently looks to be a way off a liquidity crisis. That’s not to say that this couldn’t change. Revenue is down from last year and investors will be keen to hear an update from the company on August 9th when they release their Q2 financial results.
It’s likely that revenue has fallen, and this is surely the reason that the company is looking to cut costs in the short term.
Regulation and “red tape” is often held up in a negative light, but if the crypto industry is showing us anything it’s that this scrutiny and oversight can be very important. It’s not going to stop Coinbase from experiencing difficulties in a challenging market, but the transparency makes dealing with the company as customers and investors a lot safer.
Crypto remains a high risk game and that’s not likely to change anytime soon. With that said, prices are the lowest they’ve been in a long time and we’ve just recently started to see a slight turnaround. There’s no way to know whether this is a blip on the chart or the beginning of a longer term trend, but if you want to get into crypto there are good and bad ways to go about it.
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