Explainer: Why the entire internet is talking about Coinbase as cryptocurrency prices plummet

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Image: Davor Puklavec/PIXSELL

The co-founder and CEO of major cryptocurrency exchange platform Coinbase has been forced to combat concerns the company is teetering towards bankruptcy, after a regulatory filing amid a broader storm of sell-offs and global market havoc.

On Tuesday, Coinbase CEO Brian Armstrong took to Twitter to address severe shareholder concerns over the wording of a document filed to the United States Securities and Exchange Commission (SEC).

A new first-quarter earnings report showed revenues of US$1.17 billion ($1.68 billion), under Refinitiv market predictions of US$1.48 billion ($2.13 billion), sending shares in the NASDAQ-listed Coinbase plummeting.

But that revenue downturn, caused by lower cryptocurrency trading volumes and values in the first months of 2022 compared to the hype-driven peaks of 2021, was hardly the only concern for investors.

In its SEC filing, the company intimated that crypto assets held in custody by Coinbase “may be considered the property of a bankruptcy estate”. In simpler terms: if Coinbase was to go under, “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”

The wording surged through the cryptocurrency investment community, further worsening Coinbase’s stock market woes.

In response to the panic, Armstrong declared, “we have no risk of bankruptcy”.

Regarding the SEC filing, he claimed the Coinbase simply reflected on the risk of bankruptcy as part of new regulatory requirements on crypto platforms.

The precise wording simply reflected the fact a bankruptcy court is yet to deal with the failure of a crypto platform the size of Coinbase, he added.

Coinbase is “taking further steps” to ensure its retail clientele enjoy the same protections as big-name investors, he said.

“First (and most importantly) your funds are safe, and they always will be,” the company said in a Thursday statement.

“Second, our business is healthy and we are staying the course.”

The Coinbase saga is backdropped by further volatility in cryptocurrency markets, as tighter monetary policy positions worldwide stem the flow of old-fashioned fiat currency into digital alternatives.

Recent fluctuations in the value of major cryptocurrencies like Bitcoin — trading at less than half its November 2021 highs — and Ethereum have damaged the portfolios of retail and institutional investors alike, erasing some of the fortunes gained through the heady days of 2020 and 2021.

Those tremors have even impacted ‘stablecoins’, put forward by crypto-advocates as an unwavering alternative to traditional digital assets. Terra, a ‘stablecoin’ nominally stapled to the value of the US dollar, fell as low as 26 US cents yesterday. It is currently trading at 81 US cents.

Tether, perhaps the most well-known stablecoin, is trading at 99 US cents — a significant devaluation for an asset many investors hailed as a predictable store of wealth.

Closer to home, Cosmos Asset Management on Thursday launched Australia’s first Bitcoin ETF, unleashing the investment instrument at a time of considerable investor skittishness.

The Cosmos Purpose Bitcoin Access ETF, launched on ASX alternative Cboe, “gives investors a secure and easy way to introduce cryptocurrency to their asset allocation mix,” said Cosmos Asset Management CEO Dan Annan.

The long-awaited arrival of Bitcoin ETFs on the Australian market comes as domestic lawmakers attempt to grapple with the same custodial and regulatory considerations shrouding exchanges like Coinbase.

The recent volatility will only intensify interest in the space — but perhaps not in the way true crypto-believers would have hoped.