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Coinbase reels as cryptocurrency prices slump

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Cryptocurrency trading platform Coinbase has lost half its value in the past week, including its biggest one-day drop to date on Wednesday as the famously volatile crypto market weathers yet another slump.

Coinbase reported a $430 million net loss in the first quarter, or $1.98 per share, on declining sales and active users. Analysts were expecting profit of 8 cents per share. Revenue was down as trading volumes fell, and active monthly users declined 19% from the fourth quarter.

"The first quarter of 2022 continued a trend of both lower crypto asset prices and volatility that began in late 2021," the company said in a regulatory filing. "These market conditions directly impacted our results for the first quarter of 2022."

It's unlikely those results surprised investors — Coinbase shares tumbled 43% in the four days leading up to their earnings release Tuesday. On Wednesday, shares fell 26%, to $53.72 per share. On the day of its initial public offering just 13 months ago, prices hit $429 per share, valuing the company at $86 billion. 

Shares were up nearly 3% to $55.30 per share as 11:35 EST on Thursday, putting its market capitalization at roughly $15 billion. 

Patrick O'Shaughnessy, an analyst who covers Coinbase for Raymond James, acknowledged in a note to clients that there was an ongoing debate over whether the crypto market was in one of its typical funks or if this was the post-pandemic bubble deflating.

"While management strongly believes the former will prove to be true, we suspect there is more than a bit of truth to the latter, particularly with crypto failing to serve as an inflation hedge thus far in 2022," O'Shaughnessy wrote.

Like much of Wall Street, O'Shaughnessy said his firm expects Coinbase to continue to lose money in the coming quarters, and that the "cons of increased crypto regulation down the road will decidedly outweigh the pros."

Customers face bankruptcy risk

Coinbase users may feel differently, however, after recently learning about one major drawback to their largely unregulated digital assets: a lack of bankruptcy protections. 

In its quarterly earnings report this week, Coinbase revealed that in the event of bankruptcy customers could lose ownership of their assets — which would instantly become the property of Coinbase as the debtor filing for bankruptcy.

"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," the company stated in its quarterly filing.  

The disclosure, made after the drop in share price, set off alarms among Coinbase users, concerned that the company was at risk of bankruptcy. The uproar caused CEO Brian Armstrong to post a series of posts on Twitter on Tuesday evening to allay customer fears aroused by the disclosure about the stability of the company and the overall security of their crypto assets, reported Reuters

"There is some noise about a disclosure we made in our 10Q today about how we hold crypto assets. Tl;dr: Your funds are safe at Coinbase, just as they've always been," tweeted Armstrong, adding in a subsequent tweet, "We have no risk of bankruptcy."

Meanwhile, government officials have made it clear that regulation is coming. Treasury Secretary Janet Yellen said in April that more government oversight is needed in the fledgling industry and that over the next six months, Treasury would work with the White House and other agencies to develop reports and recommendations on digital currencies.

"Our regulatory frameworks should be designed to support responsible innovation while managing risks — especially those that could disrupt the financial system and economy," Yellen said.

Stablecoins warning

On Tuesday, Yellen testified to the Senate Banking Committee, warning legislators about stablecoins, which are digital currencies usually pegged to the dollar or a commodity such as gold. In theory, stablecoins are better-suited to commercial transactions than other cryptocurrencies that can fluctuate in value. Stablecoins essentially promise investors that they can be redeemed for a dollar. However, a recent run on the TerraUSD stablecoin dropped its value to as low as 30 cents, sowing doubt among investors about the safety of stablecoins. Terra recovered somewhat, to about 68 cents on Wednesday.

"The outstanding stock of stablecoins is growing at a very rapid rate and we really need a consistent federal framework," Yellen told the committee, adding that legislation on stablecoins could be crafted by 2023.

President Joe Biden signed an executive order on digital assets in March that urged the Federal Reserve to explore whether the central bank should create its own digital currency. Biden's order also directed federal agencies to study the impact of cryptocurrency on financial stability and national security.

In a letter to shareholders, Coinbase said it believed that current market conditions were not permanent and it remained focused on the long-term while prioritizing product development.

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