Bearish Market Takes Toll on Financials in First Quarter
Coinbase will take your coins if it goes bankrupt.
That was the rather jarring message in the first quarter earnings release for the leading U.S.-based centralized exchange. It says customers balances will be considered Coinbase’s property in the event it files for administration. The disclosure highlights the custodial risks of holding crypto assets on the exchange.
“Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, 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,” Coinbase said in the May 10 filing.
‘Not Your Keys, Not Your Coins’
In traditional finance, unsecured creditors such as bond holders are typically out of luck if a company declares bankruptcy. So, too, are stockholders. Essentially, Coinbase is informing customers that they shouldn’t expect to get all or even some of their money back if the concern goes belly up.
That didn’t sit well with many in the crypto community. Many responded to Coinbase’s updated terms by reciting the popular mantra “not your keys, not your coins,” and advocated that users hold their assets in non-custodial wallets.
In the three months ending March 31, Coinbase lost $430M on $1.2B in net revenue. Investors had expected $1.4B in revenue for the quarter, according to Refinitiv. Coinbase’s shares tumbled 16% on Tuesday, according to data from Morningstar.
Coinbase’s lack of profitability is partly due to capital investments it’s making to build out the platform. Operating expenses for the quarter were $1.7B, exceeding its revenue for the first time since Coinbase began reporting its financials.
Decline in Trades
On the revenue side of the ledger, quarterly retail trade volume sank 43.5% to $309B. The number of active monthly retail users on Coinbase also dropped more than 19%. Despite the decline in trade activity, Coinbase reported a gain in market share by volume for seven of the top 10 crypto assets by market cap.
In a letter accompanying its earnings report, the exchange urged shareholders to view its stock as a long-term play on the growth of crypto sector broadly. Clearly, the bearish turn in the market is affecting its financials, at least in the short term.
“These market conditions directly impacted our Q1 results,” the company said in the filing.