Shares of Coinbase Global (COIN -9.09%) fell sharply on Monday, opening down 21% from their Friday close and trading lower by 14% as of 10:15 a.m. ET. The weekend was a rough one for the cryptocurrency markets, and as the premier exchange for digital asset trading, Coinbase often serves as a barometer of sentiment among investors who trade Bitcoin (BTC -4.67%) and other cryptocurrencies.
Indeed, a big drop in cryptocurrency prices was partially to blame for downbeat sentiment among investors, but it wasn't the whole story. News that some smaller exchanges were taking steps to halt withdrawals raised new fears among crypto investors. Although the chances of a similar step at Coinbase aren't nearly as high, there is one aspect of what's happening in the digital asset world today that could have ramifications for the company's future prospects.
Two key events over the weekend
The first thing hurting Coinbase shares was simply an abrupt move downward in the crypto markets. Bitcoin prices fell from $30,000 as recently as Friday afternoon to $23,500 Monday morning. Prices of Ether (ETH -5.10%) took an even harder hit, going from $1,750 to just over $1,200. Many smaller crypto tokens saw similar declines.
Crypto markets have seen steep drops before, but this one brought with it some signs of the stress that companies working in the digital assets space are under right now. The Celsius Network, which is a decentralized finance (DeFi) platform and one of the largest crypto-based lenders, said that it would pause withdrawals from and transfers between accounts. It cited the abrupt shift in market conditions as cause for its action, expressing its intent to honor withdrawal obligations over time.
That was troubling because of the publicity that Celsius had generated in the past. The DeFi platform offered attractive interest rates for crypto deposits, lending them out to generate revenue. Yet skeptics had pointed to loans Celsius had taken with various cryptocurrencies as collateral, suggesting that in extreme market environments, margin calls could cause a cascade effect that would threaten Celsius' survival and have a ripple effect across the industry.
Later, the much larger crypto exchange Binance announced a more limited move, halting withdrawals of Bitcoin specifically using the Bitcoin network. Unlike Celsius, Binance's move seemed to be related to a transactional issue rather than due to market conditions.
What Coinbase investors should worry about
Coinbase is a large enough company that it's far less likely than Celsius to resort to halting withdrawals of assets from its exchange. The reputational hit that would result from such a move would be devastating for Coinbase, and the company knows better than to add fuel to the fire in an environment that's already averse to crypto-related businesses.
However, Coinbase can't control negative sentiment in the broader investing community toward crypto, and its long-term business model relies on greater mainstream acceptance of digital assets to foster growth. If investors lose confidence in crypto as a result of the sharp price movements we've seen lately, then Coinbase won't necessarily be able to stem the tide of pessimistic sentiment on its own.
The threat comes at a difficult time for Coinbase in particular, as it's also going through some controversy with its employee base. After the crypto exchange platform provider rescinded some previously granted job offers and announced a hiring freeze, workers launched a campaign to remove some top executives, citing business failures and poor strategic planning. Coinbase CEO Brian Armstrong suggested in a tweeted response, "Quit and find a company to work at that you believe in."
Watch Coinbase's fundamentals
Coinbase will report second-quarter financial results in August, and by then, the impact of what's happened in the crypto markets on the exchange's revenue and profits should be clearer. Yet signs of discord within the company are warning signs that point to a potential failure in leadership and corporate culture. Without the support of rank-and-file employees, Armstrong will have a tough time moving forward in the toughest market environment for crypto in years.
