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Coinbase, the world’s largest publicly traded cryptocurrency company, closed last week at $64.55. Then the SEC knocked.
Financial regulators on Tuesday filed charges against Coinbase, alleging that it is not registered as a broker, national stock exchange, or clearing house, thus violating U.S. securities laws. Shares opened the next morning at $47.10, down 27% from the previous Friday’s close (down 7.5% on Monday after Binance was sued).
After a slight pullback, Coinbase is trading at $53.26 on Thursday morning with a market cap of $12.5 billion. That’s a painful 86% drop from its April 2021 IPO, when the company was valued at nearly $100 billion ($381 per share). ah.
In many ways, the demise of Coinbase sums up the entire cryptocurrency industry during this period. Since topping out in November 2021, the space has been in complete disrepair. The move by central banks around the world to tighten monetary policy in response to rampant inflation has lifted the rug (to use the term cryptocurrency natives) from underneath the industry.
Despite the temptation of grandeur for some investors during the pandemic (perhaps Robinhood and the cryptocurrency boom were raging and they were dizzy with explosive profits across the board). , Bitcoin and all other cryptocurrencies (at least for now) trade like high-risk assets.
Bitcoin could be an interesting debate as to whether it can be decoupled or take the inflation hedge crown. But the reality is that as of 2023, everything in the cryptocurrency space is highly correlated and on the long end of the risk spectrum.
summarized deep dive At this point in March, there were rumors that Bitcoin was being decoupled in response to bank failures. All sorts of fancy correlation graphs were used, but sometimes things don’t need to be complicated. Take a look at this chart of Bitcoin vs. Nasdaq over the past two years. Now you should know everything you need to know (pardon the axis crime).
Coinbase stock will always fall if the crypto industry retreats, but this is not rocket science as we can still see a lockstep relationship even on the way up. And as cryptocurrencies hit one after the other, from Terra to Celsius to FTX, prices collapsed, and a wave of enthusiasm for these new digital assets tumbled. For Coinbase, that zeal, a company that relies on trading volume for revenue, has been a problem. And stock prices fell.
In June 2022, Coinbase laid off 18% of its employees. Six months later, the company announced further layoffs. 20% of the company Chopped.
But Coinbases decline doesnt just mean 2022 scandals, industry-wide price crashes and mismanagement of risks. It also highlights the woes of being a cryptocurrency company in the US today and the increasingly regulated environment the company faces.
The precedent for this week’s SEC lawsuit was in March, when the SEC issued a Wells Notice (usually a notice indicating impending legal action), after which the stock fell. dropped 25%. The company has repeatedly called for regulatory clarification, providing clear guidance and, among other things, openly appealing to the SEC to clarify exactly where cryptocurrencies relate to current securities laws.
The following month, Coinbase hit back and sued the SEC, demanding the regulator respond to a July 2022 petition asking whether existing securities laws could be applied to the cryptocurrency industry.
Today, we filed a narrow lawsuit in the U.S. Circuit Court to compel a ‘yes or no’ answer to a rulemaking petition filed with the SEC to provide regulatory guidance to the cryptocurrency industry last July. I did, writes Paul Grewal. Coinbase’s chief legal officer said on Twitter.
In fact, this is what makes the SEC case against Coinbase so attractive.I wrote early this week About how I believed Binance, which was sued by the SEC on Monday 24 hours before Coinbase, had introduced itself into regulatory trouble. Binance is an exchange that operates in incredibly opaque ways, such as refusing to provide information about its debt and operating without a physical headquarters, constantly drawing the ire of regulators. Become. Like it or not, this is the reality of U.S. law, and thus the SEC suing Binance should have been widely anticipated by both the exchange itself and broader industry players (indeed, Numerous lawsuits and investigations are ongoing (against various organizations and executives of Binance).
However, Coinbase is different. This is an exchange listed on the Nasdaq in April 2021 under SEC oversight. The company sought to comply with regulators and publicly requested that it open lines of communication and provide clarity. If the SEC is now accusing them of being an unregulated stock exchange, why were they allowed to list two years ago? Did Coinbase, which was legal, now break the law?
I am not a lawyer. Far from being a lawyer, these are pure questions. I really don’t understand. That is why this case is featured as a very attractive one, as opposed to the Binance case, which looks like a typical regulatory complaint. It’s no surprise that the regulatory regime has clearly changed since FTX’s bankruptcy in November. I’ve said it before and I’ll say it again. Much of the cryptocurrency industry is mired in insider trading, fraud, and get-rich-quick schemes. FTX caught the attention of regulators and the industry jumped to the front. But nevertheless, I still believe the aforementioned question to be valid. And that is why this impending trial fascinates me.
But whatever your beliefs about whether this is “right” or “wrong,” don’t misunderstand that this is an existential threat to Coinbase as a business. Going even further, speculation can be made about the impact of Coinbase’s court loss on the US crypto industry as a whole. Sure, cryptocurrencies will live on, but then how will centralized companies operate in this space? And while it is possible, the loss of the world’s largest financial economy to the cryptocurrency ecosystem, and the institutional capital blockade it would mean, would be devastating. So will Wall Street asset managers be interested in cryptocurrencies? Which companies will break their balance sheets? Where are they going?
These are difficult times for Coinbase investors. The company is currently valued at just $12.5 billion and has gone from a tranquil era of jpeg images trading for hundreds of thousands of dollars, Tesla buying lots of bitcoin and trade finance managers frantically answering the hysterical bubble. popped off nicely. to start assigning to this initial dynamic up-only asset class.
The chart below shows Coinbase specifically. Since its IPO in April 2021, it has shown an 86% drawdown compared to various benchmarks, all of which are underperforming.
Bitcoin has fallen 59% since Coinbase went public. Ethereum fell 20% (more than doubled between April and November 2021). The tech-heavy Nasdaq is down 6%, while the S&P 500 is up a modest 3%. Even Michael Thaler’s MicroStrategy quasi-bitcoin holding vehicle has only recovered by 67%.
It’s safe to say that the company’s floating early Coinbase investors could have opted for almost any other asset and have a better life (well, just about everything. Tokens like LUNA and FTT existed ).
The future is more uncertain than ever. The macroclimate is uncertain. The tightening cycle may be coming to an end, but interest rates have climbed from near zero to above 5% at a rapid pace, and monetary policy is notoriously lagging. Pain may continue. Employment remains relatively tight, and even if the Fed persists in sticking to its 2% inflation target, it will not be easy to get there.
And the regulatory landscape is getting worse by the day. Coinbase will have its day in court, but it’s going to be big. This applies not only to stocks, but also to cryptocurrencies in general. The industry has had its reputation bogged down in scandal after scandal over the last year, wiping out prices, volumes and widespread interest in the sector. I’ve never needed a win so much.
The holders of these Coinbase stocks are betting on victory, but the challenges ahead are bleak. And that goes for the industry as a whole, not just Coinbase.
