What happened

Shares of cryptocurrency exchange Coinbase Global (COIN -2.05%) hit all-time lows on Tuesday. As of 3 p.m. EST, Coinbase stock was down almost 9% and still falling. The move was particularly unusual considering the S&P 500 and many cryptocurrencies, including Bitcoin, were all up today. However, fear is definitely starting to grip investors regarding Coinbase's long-term prospects.

So what

Here's a tangible example of how high fear is running for Coinbase investors: According to data from Morningstar, Coinbase's bonds are currently trading for $0.52 on the dollar. In other words, if the company is able to satisfy all of its long-term debt obligations, these bonds have substantial guaranteed upside. But bondholders would rather sell now than risk Coinbase defaulting later.

There are a couple of things stoking fears for Coinbase. First, rival exchange FTX completely collapsed with spectacular speed mere weeks ago. And FTX's founder Sam Bankman-Fried was consequently arrested less than 24 hours ago. Investors fear that all cryptocurrency exchanges will eventually fall apart in similar fashion, including Coinbase.

Another harder-to-quantify fear is Coinbase's relationship with USD Coin (USDC -0.00%). Coinbase partly owns USD Coin with Circle Internet Financial, and it's been a cash cow in 2022. In the third quarter alone, Coinbase generated over $100 million in interest income, much of it from USD Coin.

It's fair to question the rails on this gravy train. Circle just terminated plans to go public, which could signal it's rethinking its business model and its relationship with Coinbase. Moreover, rival exchange Binance -- the largest cryptocurrency exchange in the world -- appears to be encouraging its users to stop using USD Coin. This could lead to a drop in usage of this stablecoin, adversely affecting interest income for Coinbase.

Indeed, there could be small signs this is happening. According to CoinMarketCap, the market capitalization of USD Coin has fallen about 5% in the past week, implying fewer users.

Now what

We can clearly see that fear regarding Coinbase isn't unfounded. However, it's also fair to say it's premature to panic. As a public company, Coinbase is subject to far more transparent finances and more scrutiny than an exchange like FTX. Indeed, its financial results are audited by Deloitte -- one of the "Big 4" accounting firms.

Moreover, Coinbase is well-capitalized with $5 billion in cash as of the third quarter of 2022.

One might choose to avoid or sell Coinbase stock, doubting the cryptocurrency space or Coinbase's long-term prospects as a major player in the space. However, running for the exits based solely on FTX's fraudulent activity is the wrong move, in my opinion.