FTX Fiasco Reduces Confidence in Crypto Exchanges, Drags Coinbase Stock to New Low

On Monday (21 November 2022), the price of Coinbase Global Inc. stock (Nasdaq: COIN) dropped to a new all-time low.

On 8 November 2022, the Coinbase CFO published a blog post (titled “Our approach to transparency, risk management, and consumer protection”) in which she said:

“First, from day one Coinbase has sought to be the most secure and compliant crypto exchange. And today, Coinbase and our customers are not in any direct danger of liquidity or credit risk. Regardless of whether the Binance/FTX transaction completes, we have very little exposure to FTX and we have no exposure to its token, FTT.  Currently we have $15 million worth of deposits on FTX to facilitate business operations and client trades. We have no exposure to Alameda Research, and we have no loans to FTX. 

“Second, as a publicly traded company in the US, we’ve also built our business in a way that allows us to be transparent about our track record, balance sheet strength, and effectively and prudently manage risk for our customers and ourselves.“

She went on to say:

• “There can’t be a “run on the bank” at Coinbase. As you can review in our publicly filed, audited financial statements, we hold customer assets 1:1.“
• “We are in a strong capital position. Our public, audited financials confirm that we do not have a liquidity problem – we largely hold our assets in USD.“
• “We have an experienced, dedicated risk team. Members of our team have decades of experience managing trading and credit businesses across a range of economic cycles.“

On 11 November 2022, FTX.com issued the following press release:

And here is how — on the same day — SBF announced the collapse of the FTX empire:

The following video from Wall Street Journal nicely summarizes how FTX went bankrupt:

https://youtube.com/watch?v=AbgRB3arCpY%3Ffeature%3Doembed

On 13 November 2022, Coinbase Co-Founder and CEO Brian Armstrong shared his thoughts on SBF’s actions at FTX. According to a report by the Daily Hodl, here is what Armstrong said during an appearance on an episode of the “All-In Podcast” released on 13 November 2022:

“They had this solvency issue and instead of just letting it blow up, Sam basically said, ‘Hey we have a bunch of customer assets over here at FTX’ or he somehow basically made a loan from FTX into Alameda trying to prop it up. I don’t know why he did that. That’s the moment in my mind where he crossed the line into probably committing fraud. I think he probably lied to users, lied to investors and he went around and tried to bail out these different companies like Voyager and BlockFi to sort of come off of this thing and maybe he thought he could trade his way out of it...

“I do think there is a some contagion risk here. I think there’s other firms that had money just sitting in FTX, and that’s now going through bankruptcy court. So that’s been bad. Multicoin [Capital] came out publicly and said that they had 10% of their portfolio sorted on FTX. There’s other firms that Alameda may have had loans with, and those firms are probably struggling.

“I don’t want to say who, but we’ve received a couple of inbound calls from other people trying to get emergency financing. There’s people who may have just – totally different from FTX and Alameda – they may have just had their own portfolio that they took margin or leverage on to buy crypto and now that prices have come down a little bit, they’re getting stopped out, so that’s all been very challenging.“

https://youtube.com/watch?v=Id7cNqwqt1I%3Ffeature%3Doembed

Concern over the health of some prominent members of the crypto ecosystem (such as Genesis Trading), in the wake of the collapse of the FTX empire, concern over the solvency/safety of all centralized crypto exchanges, and very aggressive selling by Bitcoin miners has pushed down crypto prices even further in the past couple of weeks.

Today, Coinbase stock price fell to an all-time low of $40.68 by 1:00 p.m. ET on 21 November 2022 before recovering slightly to close at $41.23 (down 8.9% today anddown 87.94% since its market debut on 16 April 2021).

According to a report by CNBC, “Bank of America downgraded Coinbase on Friday, citing ‘contagion risk’ for the cryptocurrency exchange platform, even if it is not ‘another FTX’, with Senior Equity Research Analyst Jason Kupferberg writing “That does not make them immune from the broader fallout within the crypto ecosystem.”

According to Bloomberg, “Wall Street’s waning conviction in Coinbase Global Inc. has done little to deter Cathie Wood,” with Ark funds increasing their holding by 19% this month, and Ark now holding “roughly 4.7% of Coinbase’s outstanding shares.”

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