Shares of Coinbase (COIN -0.63%) jumped as much as 20% on Wednesday, based on little more than a blog post by some leaders in the company's management team. But it was the kind of post that tells a lot about how Coinbase is run, how it's handling the current market turmoil, and what investors should expect in the future.
I saw it as the most bullish signal from Coinbase in a long time. Here's what we learned.
The big news from Coinbase
On Wednesday, Coinbase executives Brett Tejpaul, Matt Boyd, and Caroline Tarnok released a blog post that clarified Coinbase's risk related to the bankruptcy or insolvency of Celsius, Three Arrows Capital, and Voyager. These financial meltdowns have collectively unearthed an incredible amount of counterparty risk in cryptocurrencies. The market fears that somehow the risk from these companies will spill over to Coinbase.
The post clarified four things:
- Coinbase's financing book has recorded no losses.
- There's no exposure to insolvencies among current clients or counterparties.
- There isn't any gating for client loan recalls or withdrawals (i.e., people are free to move their money out of Coinbase).
- There aren't any changes to credit access for trading clients.
The company's standard practice of providing over-collateralized lending, which means Conbase pledges over 100% of what's being borrowed as collateral for the loan, seems to have held up well. Under-collateralized lending has gotten some companies into trouble in the past.
What it means for Coinbase now
The post goes out of its way to explain how Coinbase assesses risk and points out that the company is more conservative in providing leverage than other companies. The intention is clearly to try to attract institutional funds to Coinbase and tell investors that the company isn't at risk.
In another telling line, the post said, "We hold customer assets 1:1," which means the company isn't lending out customer funds. This is exactly what Celsius and Voyager did, hoping to earn higher yields than they were paying out for customer funds. But when their loans went bad, customers ended up paying the price.
Coinbase isn't just saying that it is managing risk by not loaning out customer funds; it's telling customers that their funds are safe, which is intended to assure people that Coinbase is a good fiscal custodian.
Playing the long game
We're still a few weeks away from Coinbase's second-quarter earnings report, but the company is going to great lengths to tell customers that their funds are safe and that Coinbase is the best custodian in crypto. I'm not sure retail traders will care much, but institutions certainly will. The risk in crypto is high enough without taking on the risk that your exchange will go bankrupt.
I think this is notable not only for the core business, but also for the Web3 and cloud services Coinbase is building out. In the first quarter of 2022, the subscription and services segment had a 169% increase in revenue to $151.9 million. As institutions look to build Web3 applications, launch NFTs, and stake cryptocurrencies, the hope is that Coinbase can be a trusted partner.
We are seeing the long game playing out for Coinbase. The company has run its business conservatively and that will pay off in downturns like this. Now we'll see if the company can take market share before the next bull run in crypto.