It seems that the music is finally stopping for Coinbase (NASDAQ: COIN). The exchange reported a loss of US$430 million in Q1 2022 as revenue slipped 27% compared to a year ago, and the stock ($COIN) has now lost 70% of its value since March.
The results come amidst a traumatic couple of months for digital assets. BTC’s price is cratering, stablecoins are destabilizing, and regulators are growing more adept at freezing out unsavory and non-compliant projects that once would have attracted millions in unchecked investment.
And yet, the events which have led up to the current turmoil for Coinbase are timid compared to what seems sure to come.
No one knows this better than Coinbase. The figures contained in the exchange’s earnings report are bad enough, but the report also included something just as troubling: an added risk disclosure from Coinbase in which it warned that in the event of a bankruptcy, customers holding assets (including fiat) on Coinbase would be treated as unsecured creditors. In other words, these customers would be last in line to recover their share of the $256 million worth of assets held by the exchange. Effectively, those customers are wholly unprotected in the event Coinbase goes under.
At the end of 2020, such an admission might not have raised too many eyebrows. It’s easy not to care about risk when all the graphs are green. Unfortunately, it seems that drama within the digital asset markets is just getting started, and the bankruptcy scenario outlined above might be coming much faster than expected.
One of the windows into Coinbase’s future can be seen in the dramatic de-pegging of the UST stablecoin. UST, also known as TerraUSD, is an algorithmic stablecoin supposedly with a 1:1 peg to the dollar. The peg was maintained by advertising that, in theory, UST could always be swapped for $1 worth of LUNA, a sister coin on the same blockchain. This promise helped LUNA enjoy a remarkable rise in price over the last few months. However, the ‘stable’ coin began to lose its peg on May 10, causing a panicked sell-off as holders rushed to dump LUNA, further battering the price of UST.
The result was a dramatic collapse of LUNA, which lost 98% of its value almost overnight, and UST, which is currently trading at under 17 cents—this is a coin which, until a few days ago, the digital asset ecosystem thought was worth exactly a dollar at all times. But the effects spread beyond the Terra/LUNA/UST project: stablecoins account for an enormous amount of digital currency trading volume because they have overcome the volatility associated with digital assets, often being used as a gateway from fiat to more traditional assets like BTC. But if UST can become worthless overnight, what about the other, more popular stablecoins USDT and USDC?
This is a big problem for Coinbase in two ways.
First, Coinbase is part of Centre, the consortium behind the USDC stablecoin. As with Tether (USDT) stablecoin, USDC maintains its 1:1 dollar peg by promising that each USDC is backed by the equivalent amount in fiat ‘or fiat equivalents.’ This is distinct from UST, but in a much more dubious way: there’s no hard evidence that USDC and USDT have anything like the backing they say they do. A prominent stablecoin like UST, which was the third-largest before its recent demise, going up in smoke can only spell disaster for other coins similarly marketing themselves on stability.
But the real problem is much more systemic. Coinbase—and exchanges like it—have been buoyed by the allegedly fake liquidity being pumped into digital asset markets due to the likes of Tether being able to print cash out of thin air. To illustrate, Tether is the largest coin by trading volume, exceeding ETH and BTC combined. The unrestrained printing of new USDT and USDC into the market has aligned with digital currency’s massive bull run over the last couple of years. The likes of Coinbase glean incredible profits from these periods of increased prices and activity. It’s why exchanges are happy to list stablecoin trading pairs despite there being no evidence to show they are backed as advertised and despite the New York Attorney-General’s Office confirming that Tether lied about its reserves.
Ergo, when the stablecoin charade collapses, so too does the rest of the market—including Coinbase. And Terra’s very public implosion provides a sneak preview of what a rush-for-the-exit looks like when stablecoin holders realize their holding isn’t stable after all. The effects of this are already beginning, as can be seen from falling digital asset prices around the ecosystem.
This paints a dreary picture for Coinbase, and that’s without mentioning the Australian elephant in the room. When Coinbase was going public, it listed the return of Satoshi Nakamoto as an outstanding threat capable of bringing digital asset markets—and by extension Coinbase and every other exchange—to their knees. It seems that this threat was well-founded: Dr. Wright, months after a victory in the Satoshi Trial in Florida, launched an $800 billion passing-off lawsuit against digital asset exchanges, of which Coinbase is one. He accuses the exchanges of misrepresenting BTC as the Bitcoin described in the white paper, damaging his own goodwill associated with the name Bitcoin and misleading countless investors into buying assets on the belief they are buying Satoshi Nakamoto’s famous invention.
Between the poor earnings and impending existential threats, it’s helpful for Coinbase to alert their customers just how unprotected they are in the event of a bankruptcy (in reality, such disclosure was required by the SEC). But its executives probably don’t care either way—since going public in April of last year, executives have dumped over $5.7 billion worth of $COIN stock onto the market and have bought none. They’ve already cashed out. The question is how many of their customers will be able to do the same when the music stops for good.
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