Amid the cryptocurrency market downturn, exchange platform Coinbase has warned that if it were to go bankrupt, the crypto assets it holds might be considered part of the bankruptcy estate. While CEO Brian Armstrong (pictured) reassured investors that its clients' funds were safe with Coinbase, the stock price has continued to plunge.
The Coinbase [COIN] share price has lost three quarters of its value so far in 2022 as investors turn away from cryptocurrencies amid global economic and social uncertainty.
Shares in the cryptocurrency exchange platform have plunged 75% in the year-to-date to $63.03 at close on 18 May, with the price of bitcoin and Ethereum declining by 38% and 48%, respectively, over the same period.
“Fears about rampant inflation and the abrupt ending of cheap money have sent cryptocurrencies careering down a cliff edge, as investors scuttle away from risky assets,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, told FTAdviser. Fears of a recession sparked by the Russian-Ukraine war and the lingering pandemic have also knocked confidence.
When the Coinbase stock price hit a 52-week low of $40.83 during intraday trading on 12 May, Cathie Wood, the founder of Ark Invest, bought 546,579 shares in the company, spread out across its ARK Innovation ETF, Next Generation Internet ETF and Fintech Innovation ETF.
“Given its inherent profitability, competitive position and massive opportunities, we believe the company is right to focus on investing in its derivatives offerings, NFT platform and international expansion,” Wood said in a note to clients.
Coinbase’s crypto assets on the line
In its first-quarter results, Coinbase reported 9.2 million monthly transacting users, down from 11.4 million in the fourth quarter of 2021. The company blamed asset price volatility and lower crypto values for the dip in customers. As a result, Q1 total trading volume was down 44% compared to Q4 at $309bn.
The slowdown meant that its net revenue of $1.2bn missed forecasts of $1.48bn. Overall, Coinbase’s transaction revenue declined 56% compared to Q4, “when crypto asset prices were at all-time highs. The company made a net loss of $430m, which marked a turnaround from its net income of $771m in Q4. The downbeat earnings meant that it forecasted total trading volume to be lower in Q2 compared to Q1.
“We believe these market conditions are not permanent and we remain focused on the long-term. In fact, our investment in our business now is especially critical – these periods of low volatility can provide the opportunity to focus more intently on product development,” the group said in its report The company added that it had launched Coinbase NFT and seen growth in the adoption of Coinbase Wallet.
Concerningly, in its 10-Q filing with the US Securities and Exchange Commission (SEC), the company warned that custodial held crypto assets might be considered the property of a bankrupt estate. “In the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”
Coinbase CEO Brian Armstrong tried to calm investor fears on Twitter. “There is some noise about a disclosure we made in our 10Q today about how we hold crypto assets. Your funds are safe at Coinbase, just as they’ve always been,” he tweeted.
Still, the Coinbase share price buckled. It dropped a total of 35% between the close of 9 May, the day before the results, and 11 May.
Drop in trading volume between Q4 '21, and Q1 '22
Coinbase shares rated ‘outperform’
According to MarketScreener, analysts have a consensus outperform rating on the stock and a target price of $163.32, indicating a seemingly unflinching investment case for the company.
Needham analyst John Todaro, for example, has a $173 target and is excited by Coinbase’s longer term opportunities “around blockchain rewards and cloud subscription services” despite the results, which he described as “disappointing”.
But Mizuho analyst Dan Dolev is less convinced, lowering his price target to $60 from $135. In a note to clients, he gave a word of warning: “The foundation upon which the business is built is less stable than perceived.”
Indeed, Russ Mould, investment director at AJ Bell, is not convinced that the cryptocurrency market will recover in the long term. “The modest recovery of bitcoin after this week’s cryptocurrency crunch will have done little to repair its status as a store of value,” he said in a note to clients. “The concern now for crypto asset investors is when the slide will end,” Simon Peters, a crypto market analyst at trading platform eToro, said as reported by iNews.
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