Coinbase is one of the world's biggest and most influential cryptocurrency exchanges. With millions of users and an ever-growing list of services, Coinbase is an industry leader. However, despite its success and popularity, after the recent FTX fallout, many wonder if Coinbase could go bankrupt.
And a disclaimer: I am not trying to fearmonger or create FUD. After the collapse of FTX (which was significant), asking these questions is more important than ever.
The Argument for Bankruptcy
The crypto space is volatile and unpredictable. The price of cryptocurrencies can drop drastically in a short amount of time. This could lead to a decrease in Coinbase's trading volume, resulting in a decrease in revenue. Combined with the high cost of running an exchange, this decrease in revenue could potentially lead to Coinbase going bankrupt.
Looking at the Coinbase stock price, you can see its value has dropped 82.53% over the past year:
Despite the significant drop in share price, Coinbase is not alone. Tech stocks across the board are down, and even companies like Apple haven't been immune to turbulent market conditions.
You could make a convincing argument that Coinbase is too big to fail. Given its stature and brand recognition in the ecosystem, if it were to get into financial strife, the likelihood that investors would bail it out would be high, especially considering it is a publicly listed company.
Still, we saw during the 2008 GFC that financial institutions once deemed "too big to fail" collapse because sometimes a financial storm is too big; it cannot be contained, and the only thing you can do is let it run its course and die out.
In May 2022, before the FTX situation and bankruptcy of platforms like DeFi, Coinbase sparked fear by adding a risk clause to its terms mentioning bankruptcy. In a Securities and Exchange Commission filing, Coinbase stated a bankruptcy court could consider customer assets and Coinbase as the custodian of a bankruptcy estate's property.
In its Q2 earnings report, Coinbase reported a drop in revenue of close to 60%. They are reporting a death blow of losses worth about 1.1 billion. These losses are due to macroeconomic factors and a drop in trading volume, but they are staggering losses.
With these above factors, what would happen if there was a "bank run" on Coinbase? Would it sustain the run if large account holders started to withdraw large amounts of money in a short period? Does Coinbase have the liquidity to pay out a bank run of withdrawals?
The Argument against Bankruptcy
Coinbase has been in the business for over eight years and has proven to be a reliable exchange. Furthermore, Coinbase constantly innovates, adding features and services to its platform. This shows that Coinbase is here to stay and will not likely go bankrupt soon.
In addition, Coinbase has a long list of investors and partners, including venture capitalists, banks, and governments. This shows that Coinbase has built a strong reputation and solid financial footing.
One reassuring thing is Coinbase does not use its customer's deposits to take out loans or trade. Coinbase operates based on earnings through fees and not customer deposits like a traditional bank or dodgy exchange would.
This means that if there were a bank run on Coinbase, in theory, it should have all of the liquidity it needs to honour withdrawals.
Despite the fact Binance is arguably the exchange of choice for many, don't discount Coinbase. They were one of the first platforms to make buying Bitcoin and other cryptocurrencies using a credit card easy. I also believe that Coinbase has one of the nicest user interfaces around. It's beginner friendly and the platform you tell your friends and family to use when they want to buy crypto with a credit card (well, I do).
So, while it is easy to see the precarious financial position Coinbase is in, and I doubt their next quarterly report will be that favourable given the FTX fallout, Coinbase, like Bitcoin, will prevail and survive in the long run because it's a properly managed exchange run by people with experience as well as an experienced advisory and investment board.
Conclusion
Based on the arguments above, it is unlikely that Coinbase will go bankrupt. The company has proven to be reliable and has strong financial backing. However, the crypto space is volatile, and anything can happen. Therefore, it is important always to be prepared for the worst.
Not your keys, not your funds. Only keep what you need on exchanges and the rest on wallets with keys you control. Be prepared for the worse, and expect the best.
Posted Using LeoFinance Beta