Coinbase Amasses $4 Billion in Cash in Event of “Crypto Winter”
Coinbase, which started its Nasdaq listing in April in one of the most anticipated initial public offerings of 2021, as this was the first crypto exchange to go public, acknowledged it had stockpiled cash in the event of a “crypto winter.”
The company has amassed $4 billion in cash as it prepares for closer regulatory scrutiny and to weather a slew of business risks in the crypto industry, CFO Alesia Haas told The Wall Street Journal.
Haas told the WSJ that the company stress-tests its balance sheet to ensure it has adequate funds on hand to prepare for a stricter regulatory regime, possible cyberattacks or potential trading declines.
“We want to ensure that we maintain those cash reserves so that we can continue to invest and continue to grow our products and services in the event that we go into a crypto winter,” Haas told the WSJ.
Peter Cohan, a lecturer of strategy and entrepreneurship at Babson College’s MBA program and author of “Goliath Strikes Back,” tells GOBankingRates that if he owned Bitcoin or any cryptocurrency, “the idea that Coinbase was raising cash to protect itself against a crypto winter would send chills down my spine.”
“I would get all my money out of crypto and put it somewhere safer. I give Coinbase credit for acknowledging how vulnerable it is to a regulatory crackdown. But putting $4.4 billion where its mouth is, is a loud warning that Coinbase’s business could quickly melt away if the SEC cracks down hard enough. I would get as far away as possible before that happens.”
Coinbase acknowledged the potential so-called crypto winter in a letter to shareholders earlier this month.
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“The wind is in our sails right now, and it feels good. But crypto is a young volatile industry and there will come a day when times are harder. We know this because we’ve experienced major crypto winters where financing was difficult to get, partners cut us off, and we lost large parts of our employee base. Tension gets high during these times. We’ve sustained by enduring, and not over-reacting. It’s never as good as it seems, and it’s never as bad as it seems,” the company said in the letter.
Coinbase reported its first earnings ever as a public company earlier this month, noting it had tripled its revenue in the first quarter of 2021 with total revenue of $1.8 billion. Net revenue was $1.6 billion, of which $1.5 billion was transaction revenue and $56.4 million was subscription and services revenue, according to the letter to shareholders. This compares to the $585 million in revenue in the fourth quarter of 2020.
The stock appeals to investors who want to get involved in Bitcoin and have exposure to the crypto, without holding the asset and hence being subjected to wild swings.
Despite its strong results, Coinbase said in the letter to shareholders that the rapid expansion of the cryptoeconomy also creates challenges for the company, especially with competition increasing as new market entrants join the cryptoeconomy every month. “Our competitors are supporting certain crypto assets that are experiencing large trading volume and growth in market capitalization that we do not currently support, as well as offering new products and services that we do not offer. We welcome these challenges as they indicate that the market we serve is growing rapidly, but we also have to continue to move quickly to address them, and that inspires us towards action and growth,” the letter stated.
Competitors, such as eToro, for example, are more diversified in terms of their offerings. Shalom Berkovitz, eToro’s CFO and deputy CEO, tells GOBankingRates that “as a multi-asset investment platform, eToro benefits from diversification and is not dependent on any one asset class being in favor. The diversity of eToro’s product offering and its global footprint support sustainable long-term growth.”
Regulatory risks Coinbase could face include a provision in the infrastructure bill about the crypto industry aimed to help pay for a part of the bill. The provision broadens the definition of a broker to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person,” according to the text of the bill. This language would require crypto brokers to report customer information to the IRS, CNBC reported. The bill doesn’t exclude miners, software developers, stakers and other individuals in the crypto economy who don’t have customers.
In addition, earlier this month, Securities and Exchange Commission Chair Gary Gensler addressed crypto regulations, saying that “right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West.” Gensler added that “this asset class is rife with fraud, scams and abuse in certain applications. There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced and complete information. If we don’t address these issues, I worry a lot of people will be hurt.”