May Coinbase (NASDAQ:COIN) be the Subsequent FTX?

Following the scandal and chapter surrounding the Bahamas-based cryptocurrency trade FTX, the entire crypto economic system has as soon as once more discovered itself beneath elevated scrutiny. Can crypto holders belief centralized exchanges? If not, is the decentralized mannequin higher if there are not any regulators and security valves to guard them? You possibly can simply see why religion in cryptos gaining elevated adoption goes down the drain. From “What’s going to be Bitcoin’s (BTC-USD) worth subsequent yr?” the dialog has shifted to “Which is the subsequent crypto trade about to crumble?” Nonetheless, for my part, Coinbase (NASDAQ: COIN) will not be the subsequent FTX, and I’ll clarify why on this article.

Nonetheless, contemplating that Coinbase is now the second-largest crypto trade by common liquidity and the most important publicly-traded firm within the area, buyers have been pondering whether or not abandoning ship ahead of later could also be a sensible option to make right this moment.

Additional, administration’s lack of consideration to shareholder worth creation, as confirmed by the absurd stock-based compensation ranges, ought to hold irritating the markets. Additionally, the corporate’s future prospects are as speculative as they will get. Accordingly, I’m impartial on the inventory.

Why Coinbase is Not the Subsequent FTX

As quickly as crypto holders came upon that they couldn’t withdraw their funds from FTX, customers and buyers of all crypto exchanges grew immediately uneasy. What if this happens in different exchanges, together with Coinbase? Nicely, regardless of the a number of risks tied to the crypto universe, it seems that Coinbase has taken a considerably extra disciplined strategy on the subject of dealing with its customers’ funds, pushed by excessive transparency.

What’s the Danger of a “Financial institution Run?”

To begin with, in concept, there can’t be a financial institution run at Coinbase as a result of, based mostly on its publicly filed, audited monetary statements, the trade holds buyer property at a 1:1 ratio. All its institutional lending actions are on the buyer’s discretion and backed by collateral. Thus, the corporate helps that it has no gating (the follow of briefly blocking withdrawals) for consumer mortgage recollects or withdrawals.

Are There Any Different Liquidity Issues?

Coinbase could be very, very liquid. Once more, each buyers and customers right here profit from the truth that the corporate’s financials are publicly out there and closely audited. The corporate primarily holds its property in USD, and it ended Q3 with $5.6 billion in whole out there USD assets. Of those, $5 billion had been precise money and money equivalents.

Moreover, being a publicly-traded firm, the corporate can at all times entry new funds by the issuance of extra shares. If one thing had been to go incorrect and Coinbase wanted additional funds, they might at all times faucet into the capital markets with ease. Would issuing shares for money destroy shareholder worth, particularly if it had been to be adopted by a “unhealthy” occasion that had already despatched the inventory decrease? Completely. Nonetheless, figuring out that the corporate stays actually liquid and has entry to additional liquidity makes it very reliable amongst its customers relative to its personal trade friends.

Lastly, by using a devoted threat crew, the corporate has a wonderful observe report of working excellence thus far. Particularly, the corporate has by no means recorded losses from its financing guide, has no publicity to consumer or counterparty insolvencies (excluding $15 million price of deposits on FTX to allow enterprise operations and consumer trades, which is pocket cash), and has no report of gating for consumer mortgage recollects or withdrawals.

Excessive Hypothesis and Inventory-Based mostly Compensation Killing the Inventory

Okay, so Coinbase undoubtedly seems to be strong compliance and liquidity-wise, however is the inventory price shopping for? What about its future prospects? Nicely, right here’s the factor: no person is aware of. Coinbase’s future financials are topic to the wild fluctuations of crypto property, in addition to the engagement of its customers with these fluctuating property. How a lot cash Coinbase will make subsequent yr is extra speculative than what Bitcoin’s worth will probably be sooner or later, and the vary right here is something from $0 to Cathie Wooden’s $1 million by 2030 goal. It’s this underlying hypothesis in all this that’s threatening the inventory and leading to such destructive hedge fund/investor sentiment.

Additionally, if there may be one other issue threatening the inventory, that’s Coinbase’s stock-based compensation, which is totally ridiculous. SBC has amounted to $1.4 billion over the previous 4 quarters. In the meantime, EBITDA over the previous 4 quarters quantities to $100 million. Do you see the issue right here? Let’s take final yr, as an example, which was a wildly-profitable interval for Coinbase, together with the corporate recording $4.53 billion in EBITDA amid report crypto costs and curiosity in crypto.

Even then, SBC was nonetheless near 1/4 of EBITDA, which is simply ludicrous. The corporate is diluting shareholders manner sooner than it will possibly create worth for them, particularly throughout such a downbeat interval within the crypto area.

Is COIN Inventory a Purchase, In accordance with Analysts?

Turning to Wall Road, Coinbase has a Reasonable Purchase consensus score based mostly on 9 Buys, seven Holds, and three Sells assigned up to now three months. At $74.59, the typical Coinbase inventory forecast implies 75.9% upside potential.

The Takeaway 

Coinbase options a number of qualities that decrease its probabilities of turning into the subsequent FTX. Nonetheless, this has nothing to do with how properly the corporate really performs financially shifting ahead, particularly throughout such a highly-distrustful crypto atmosphere. Within the meantime, stock-based compensation is quickly diluting shareholders whereas uncertainty within the crypto area is rising. Thus, be cautious earlier than allocating capital to COIN inventory.


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