This story was originally published in FIN, the best newsletter about fintech; subscribe here.
It’s been a sterling week for scandal connoisseurs. Particular highlights include fallen crypto god Sam Bankman-Fried’s manic “interview” with Vox writer Kelsey Piper, in which he disavowed just about everything he ever stood for except greed; especially juicy was his concise “fuck regulators” formulation. Then there was newly minted FTX CEO John Ray, announcing that he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” And he was hired to clean up Enron!
From the moment FTX’s blood hit the
Not to be outdone, on Thursday Coinbase took out a full-page ad in The Wall Street Journal, never mentioning FTX by name, but lamenting that “millions of people put their money—and trust—with people that didn’t deserve it.” On the face of it, Coinbase would appear to be able to capitalize on FTX’s collapse. The company has spent years trying to position itself as the safe, reliable crypto exchange that plays by the rules, however reluctantly. It is headquartered in San Francisco, not in the Bahamas like FTX or basically nowhere, like Binance. Since April of 2021, it has been a publicly traded company, subject to all the power of federal regulators and the discipline of the market. It holds customers’ assets 1:1, which sounds pretty elementary but given what we’ve learned about FTX, it matters.
But the “trust us” propaganda can’t undo the fact that Coinbase is inextricably caught up in the FTX mess and its long-term effects on the crypto market.
(Coinbase did not respond to an interview request.) The thing about a sector meltdown is that it punishes the deserving and undeserving with equal malice. There are three related reasons why Coinbase will struggle in the near future.
Coinbase, naturally, is a large holder of cryptocurrency. When Coinbase went public early last year, the price of Bitcoin (and many other cryptocurrencies) was soaring, which made the company look richer than it arguably was. Today, Coinbase is on the wrong side of that equation. In the first nine months of 2022, Coinbase recorded nearly $700 million in impairment of its crypto assets, about three times the impairment it recorded in the first nine months of 2021. Sure, it’s possible that crypto assets will snap back some day, but few are expecting that day to come soon. The lead editorial in this week’s Economist concludes “The more scandals ensue, the more the whole enterprise and its aspirations become tainted. The lure of innovation means nothing if investors and users fear their money will disappear into thin air. For crypto to rise again, it must find a valid use that leaves the dodginess behind.”
Even before FTX’s implosion, Coinbase stopped adding customers. At the beginning of this year, Coinbase had nearly 9 million “monthly transacting users” (MTUs); for the third quarter, that number had dropped to 8.5 million MTUs, and the company had to disclose that it had overstated its MTU estimates in the past. Maybe Coinbase can pick up a few thousand disgruntled FTX customers, but even the biggest optimists don’t think its user base will grow at anywhere near the rate it did in previous years. And the third quarter trading volume was less than half of 2021’s third quarter, so what customers Coinbase has held onto are trading a lot less than they used to.
Coinbase lives and dies with the price of cryptocurrency. In important ways, Coinbase is an uncomplicated business. When crypto prices were high and people were buying and selling a lot of it, Coinbase stock performed very well. Today, prices are at or near two-year lows, and Coinbase stock is equally depressed. The correlation between Coinbase stock and the price of Bitcoin is pretty obvious:
Another way of looking at it: In January, Bank of America had a “buy” rating on Coinbase stock, with a very sunny price target of $340 a share. This week, it downgraded the stock to “neutral” and lowered the target to $50. It’s worth noting that short interest in Coinbase is a little lower than it was in the summer, but Coinbase remains one of the most shorted stocks.
Can increased regulation boost confidence in the crypto sector? Maybe. Coinbase CEO Brian Armstrong has rarely had kind words for US regulators, and to some degree he blames US regulators for pushing companies like FTX to the Bahamas, where regulation is close to irrelevant. The problem for Armstrong is that the regulation that is likely to arise from the FTX scandal is bound to make his business harder and more expensive to operate.