Coinbase Update & Crypto Peril
Coinbase came out with its earnings last week.
The results were very poor. Despite very negative expectations going into the release they were actually far worse than expected and led to a sharp drop in the company's share price.
Coinbase’s revenue declined almost 64% in the quarter.
Coinbase reported a $1.1 billion net loss, compared with $1.59 billion in net income in the same quarter last year.
Their user base is also shrinking. The company now expects 7 to 9 million transacting users, down from 5 to 15 million three months ago.
The stock price collapsed 11% after the numbers came out. It was down over 75% this past quarter. The reason for this collapse was pretty simple:
Coinbase loses money every quarter and lost even more than expected.
In fact, they lost $4.98 per share, vs. a loss of $2.65 per share that was expected by polling analysts that cover the company.
As we note above, they also lost clients. This suggests that they could also be losing yet more funds in the future as their user base shrinks and the crypto bubble continues to deflate.
We are not here to write about the stock price, however. Rather, we are here to re-emphasize something we wrote about the other week.
Ironically, this was also something the company itself has recently made clear in disclosure documents are part of their quarterly earnings process.
Namely, the fact that if Coinbase (or any other crypto exchange) goes bankrupt, the account holders will be junior creditors.
What that means is in practice is: you get paid out last, not first.
In a liquidation, the other creditors in the company - and the list in Coinbase's case is long and distinguished - will receive their allocated capital, if any, first.
Put differently, you could have a Coinbase account, you could have (significant) amounts of cryptocurrencies in that account and zero issues with your own financial strength and it will not matter.
We made exactly this point in our previous newsletter but it was towards the bottom and might have either glossed over or straight up ignored.
There are endless possible reasons a crypto holder for thinking this won't really matter for you.
You might not care about excluding Coinbase in your portfolio,
you might not worry about your capitol allocated in your Coinbase account,
you might simply by setting and forgetting your crypto-portfolio to some far point in the future.
Most of all, you might think because you are not bankrupt that no one can take away your hard earned capital. Well, they can.
And we think even the slight chance of crypto exchange bankruptcy is very important!
This would lead to Coinbase users losing significant portions of their crypto savings through no fault of the currencies or themselves.
(though in any such bankruptcy, the entire crypto complex would likely suffer extremely)
That would be very negative and, when we look around, that probability seems dismissed by nearly everyone: cryptocurrency owners, Coinbase account holders, regulators, politicians, financial analysts, you name it.
Bitcoin, Ethereum etc could survive and thrive but Coinbase (or some other exchange!) could be simply wreckage along its path.
Fundamentally, a company that loses money could always simply cease to be a company.
Being a junior creditor sucks. It is the ultimate small fry, nearly zero agency, small stack/big blind, no recourse position and we really hope and worry that no one should ever find themselves in that position in a cryptocurrency exchange bankruptcy.
Don't be a junior creditor with your crypto account. It is all risk and very little reward. Take steps to protect your crypto assets and find another solution to hold your coins.
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