As if Coinbase Global, Inc. (NASDAQ: COIN) were not feeling enough pressure from recent significant declines in cryptocurrency prices and abysmal 1Q 2022 earnings results, a disclosure in its 1Q 2022 10-Q report introduces a new, surprising risk: if Coinbase were to seek bankruptcy protection, its digital currency account holders could lose at least some of their holdings.
Those assets – Coinbase currently holds US$256 billion on behalf of its customers – would be considered part of any bankruptcy proceedings, and holders would be treated as general unsecured creditors of the company. Essentially, customers would be treated like they made unsecured loans to Coinbase and, upon settlement of the bankruptcy, would receive, up to the value of their accounts, a percentage of what was left in the estate after secured creditors were repaid. During this time frame, crypto customers would not be able to access their accounts.
All this could occur — keep in mind that COIN has of course not filed for any bankruptcy protection; indeed, its current stock market valuation is US$17.8 billion – because Coinbase customers generally store their crypto holdings in a wallet controlled by Coinbase. For ease of use, customers further agree to access their accounts by using a conventional password, not a private key, which is a long string of characters, that Coinbase controls. Coinbase’s control of this private key is what potentially could subject account holders to the whims of a bankruptcy court. (All these comments also apply to Robinhood Markets, Inc. (NASDAQ: HOOD) and its crypto account holders.)
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A safer way to store crypto holdings entails the use of a concept called cold storage. Such a technique utilizes a USB-like hardware device, costs perhaps a few hundred dollars, and takes crypto holdings completely offline and off exchanges, eliminating any hacking or exchange bankruptcy risk described above. A downside is such a security procedure makes it more cumbersome to trade digital currencies.
As an aside, stocks held by an online (or conventional) broker are protected in the U.S. by the Securities Investor Protection Corporation (SIPC) for up to US$500,000 per client. The account holder receives this protection whether or not he/she is a U.S. citizen.
Coinbase’s 1Q 2022 results constitute a remarkably fast downturn from generally good results quarter-by-quarter in 2021. Its adjusted EBITDA was merely US$20 million 1Q 2022, down from US$4.1 billion in the full year 2021. Coinbase’s lowest quarterly adjusted EBITDA in 2021 came in 3Q 2021, when it recorded positive US$618 million.
| (in millions of US dollars, except otherwise noted) | 2022E | 1Q 2022 | Full Year 2021 | 4Q 2021 | 3Q 2021 |
| Monthly Transacting Users, or MTUs (millions) | 5 to 15 | 9.2 | 8.4 | 11.4 | 7.4 |
| Retail Trading Volume | $74,000 | $535,000 | $177,000 | $93,000 | |
| Institutional Trading Volume | $235,000 | $1,136,000 | $371,000 | $234,000 | |
| Trading Volume | $309,000 | $1,671,000 | $547,000 | $327,000 | |
| Retail Assets on Platform | $123,000 | $141,000 | $141,000 | $116,000 | |
| Institutional Assets on Platform | $134,000 | $137,000 | $137,000 | $139,000 | |
| Total Assets on Platform | $256,000 | $278,000 | $278,000 | $255,000 | |
| Total Market Capitalization of All Crypto Assets | $2,321,000 | $2,321,000 | $2,090,000 | ||
| % on Coinbase Platform | 11.5% | 11.5% | 12.2% | ||
| Transaction Revenue | $1,013 | $6,837 | $2,277 | $1,090 | |
| Subscription/Services Revenue | $152 | $518 | $213 | $145 | |
| Net Revenue | $1,165 | $7,355 | $2,490 | $1,235 | |
| Transaction Expenses as % of Net Revenue | Low 20% range | 24% | 17% | 20% | 16% |
| Sales & Marketing Expenses as % of Net Revenue | 12% to 15% | 17% | 9% | 10% | 9% |
| Technology and Development Plus G&A Expenses | $4,750 | $984 | $2,201 | $757 | $599 |
| Adjusted EBITDA | $20 | $4,090 | $1,205 | $618 | |
| Net Income | ($430) | $3,624 | $840 | $406 | |
| Cash, Including Digital Assets | $6,116 | $7,123 | $7,123 | $6,353 | |
| Debt – Period End | $3,486 | $3,491 | $3,491 | $3,496 | |
| Shares Outstanding (millions) | 261.9 | 261.9 | 261.9 | 261.9 |
Coinbase’s cash balance fell to US$6.1 billion at March 31, 2022 from US$7.1 billion as of December 31, 2021. Remarkably, the company still plans to boost its aggregate Technology & Development and G&A expenses to US$4.25 to US$5.25 billion in 2022, more than double the US$2.2 billion spent in 2021.
Despite dropping about 80% since November 2021, Coinbase stock does not look cheap. Its enterprise value is around US$15 billion, which seems difficult to square with a business that seemed almost to collapse in the just-completed quarter.
Coinbase Global, Inc. last traded at US$67.87 on the NASDAQ.
Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
