The implosion of FTX (FTT) has many people wondering if Coinbase (COIN) will collapse?
Predictably, the celebrity doomsayers are making hysterical claims about Coinbase to attract attention. In particular, Black Swan author Nassim Taleb calls Coinbase “a sinking ship” that will collapse. Since, I think Taleb, a trader turned philosopher, has no crypto or blockchain knowledge or experience, his claim is hysteria.
How to Make Centralized Exchanges Safe
Notably, somebody who has a vast amount of crypto knowledge Ethereum (ETH) mastermind Vitalik Buterin thinks they can make centralized exchanges (CEXes) such as Coinbase safe. Buterin thinks exchanges can demonstrate proof-of-solvency improve privacy with new technologies, such as ZK-SNARKS.
A Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (ZK-SNARK) provides proof-of-solvency by creating a secret key before making a transaction. Theoretically, the secret key provides proof-of-solvency and evidence they have the money.
Buterin speculates exchanges can keep users deposits’ safe by putting them into a Merkle Tree. The exchange can use ZK-SNARKs to show the money is in the accounts. To elaborate, a Merkle Tree is a structure that shows how they encode data. For example, a blockchain Merkle Tree shows data or money is in a blockchain ecosystem.
Thus, the technology to make centralized exchanges such as CoinBase (COIN) safe, liquid, and transparent exists. The challenge is using that technology.
Why Regulation May Not Save Cryptocurrency Exchanges
In a blog post about centralized exchanges, Buterin notes that regulation alone cannot save blockchain investments from crashes, runs, and insolvency.
History shows, Buterin is correct. Regulations in the United States and other countries did not prevent the 2007-2008 Financial Crisis and the collapse of Lehman Brothers. Instead, history shows what prevents financial crises are mechanisms that ensure solvency and liquidity, such as deposit insurance.
For example, the 2008 Financial Crisis ended when the US Treasury started bailing out financial institutions with the Troubled Asset Relief Program (TARP). Hence, the Treasury and Federal Reserve guaranteed investments solvency, which ended the crisis. People stopped pulling out their funds when they knew the money was there.
Notably, there were no bank runs in the United States during the 2007-2008 financial crisis because of the Federal Deposit Insurance Corporation (FDIC). To explain, the FDIC insures most bank accounts up to $250,000 and trust accounts up to $1.25 million. That means depositors get their money even if the bank collapses.
I think the best way to keep cryptocurrency and central exchanges solvent is to insure digital assets such as stablecoins. Or for the Federal Reserve to issue a US Stablecoin backed by the treasury. I think events will force governments and central banks to insure stablecoins and cryptocurrencies at some point.
Is Coinbase (COIN) making money?
Mr. Market retains faith in Coinbase Global Inc. (NASDAQ: COIN). He paid $41.23 for Coinbase shares on 18 November 2022. However, Coinbase’s share price fell from $315.48 on 22 November 2021.
Coinbase is losing money and revenue. For example, Coinbase’s quarterly income fell from $291.81 million on 30 September 2021 to -$556.48 million on 30 June 2022. Coinbase reported three quarters of operating losses in 2022. They reported quarterly losses of -$554.56 million on 31 March 2022 and -$1.044 billion on 30 June 2022.
Moreover, Coinbase’s quarterly revenues fell from $1.312 billion on 30 September 2021 and $2.498 billion on 31 December 2021 to $590 million on 30 September 2022. Stockrow estimates Coinbase’s revenues have shrank for three straight quarters. The quarterly revenue growth rate went from –35.26% on 31 March 2022 to -63.73% on 30 June 2022 to -55.03% on 30 September 2022.
Finally, Coinbase’s quarterly gross profit fell from $1.115 billion on 30 September 2021 and $1.997 billion on 31 December 2021 to $488.46 million on 30 September 2022. Coinbase is making less money as its revenues shrink. So yes, Coinbase is in trouble.
How Much Cash is Coinbase burning?
Frighteningly, Coinbase (COIN) is burning enormous amounts of cash. For example, Coinbase reported a quarterly operating cash flow of -$2.842 billion on 30 June 2022.
The quarterly operating cash flow fell from -$729 million on 31 March 2022 and grew to -$940 million on 30 September 2022. Thus, Coinbase reported three straight quarters of negative operating cash flows. However, Coinbase reported a quarterly cash flow of $3.016 billion on 31 December 2021.
Yet Coinbase can generate enormous of cash. It reported a quarterly ending cash flow of $16.166 billion on 31 March 2022. However, the quarterly ending cash flow fell to -$3.275 billion on 30 June 2022 and -$1.271 billion on 30 September 2022.
Interestingly, Coinbase is not borrowing money. It reported negative quarterly operating cash flows of -$201 million on 30 June 2022 and -$46 million on 30 September 2022. However, Coinbase reported a quarterly financing cash of $1.958 billion on 30 September 2021 showing some borrowing.
Coinbase reported $3.684 billion in total debts on 30 September 2022. The total grew slightly from $3.496 billion on 30 September 2022. Yet Coinbase retains some cash. It had $5.398 billion in cash and short-term investments on 30 September 2022. The cash and short-term investments fell from $7.255 billion on 31 December 2021 and $6.476 billion on 30 September 2022.
What Value Does Coinbase offer?
Coinbase (COIN) retains some value because of its platform. Coinbase claims it had 108 million verified users and $101 billion in assets in its platform on 30 September 2022.
Coinbase reported a trading volume of $159 billion for the quarter ending on 30 September 2022. Plus, Coinbase claimed to have users in over 100 countries on 30 September 2022.
Coinbase experienced incredible asset growth in the year ending on 30 September 2022. The total assets grew from $18.454 billion on 30 September 2021 to $111.168 billion on 30 September 2022.
I think the enormous asset growth at Coinbase gives COIN value potential. To explain, Coinbase could grow into a financial giant if it does not run out of cash.
Can Coinbase (COIN) Survive?
However, I think there are two ways for Coinbase (NASDAQ: COIN) to survive and thrive. First, Coinbase could become a bank or buy a bank and start offering FDIC insured products. Notably, Binance CEO Zhao “CZ” Changpeng is thinking about buying a bank, Bloomberg claims. Binance (BNB) is one of Coinbase’s biggest competitors.
Second, a bank such as BK Mellon (BNY) could buy Coinbase. BNY Mellon operates a Digital Asset platform in competition with Coinbase. I think BNY Mellon could be Coinbase’s most dangerous competitor because it is a bank. Thus, the Federal Reserve, FDIC, and US Treasury have to bail BNY Mellon out if it gets into trouble.
I think Coinbase resembles a bank and will have to become a bank or join at some point. Moreover, federal regulators could force Coinbase to become a bank. Hence, I believe Coinbase can survive and thrive if it becomes a bank.