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Coinbase (NDQ:COIN), arguably the world’s leading cryptocurrency trading platform, has put investors and crypto traders in a spin this week. Stock has been on a slide for some time now: shares were trading at $357 in July, but after its recent earnings report, closed at $53.72 on NASDAQ Wednesday night.

Shares were already being punished as negative economic news is testing the crypto market. But they have really lost half their value in a week. What is causing all the negativity, and should you even consider staying in the stock?

The Coinbase results

Coinbase came out with some terrible numbers first of all. The company reported a $430m net loss for Q1, or $1.98 per share. It also had to fess up to declining sales and active users. This was way off where analysts had expected it to come in which was consensus 8 cents / share. Trading volumes are down, as are revenues. Active users are down 19% against Q4 2021 figures. Investors were already selling the stock going into the announcement. It is trading well off the $429 it saw on the first day of trading on NASDAQ.

The bankruptcy statement

Buried in its financial statement was a surprising admission from Coinbase, that if it should ever go bankrupt, the assets of investors that it holds would potentially be closed off, as legally they would be treated as assets of Coinbase. This is a huge deal. It is an issue some institutional investors in cryptocurrency, which The Armchair Trader has spoken to, were already aware of. Early mover crypto hedge funds have identified custody of assets as a risk factor that has emerged as a result of due diligence. For the biggest exchange on the block to fess up to this will have many investors wondering.

With Bitcoin testing the $30,000 mark, cryptocurrency trading is going through a bit of a coming of age. Many investors had been starting to look at BTC as a possible inflation hedge. Research house Raymond James has been speculating that what we are really looking at is a post-pandemic bubble deflating. During the pandemic, there were many retail traders in the market who were locked up at home. Now with restrictions being lifted, many casual traders are leaving the market to do other things. Coinbase is just one of the victims of this.

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And then there’s cryptocurrency regulation

Flagged up as one of the big market risks by this site in November, was the possibility of regulation of the crypto markets. The Coinbase announcement is going to provide further momentum to that. Raymond James reckons Coinbase will continue to lose money as long as there is no clarity on what a future SEC regulatory framework will look like. US Treasury Secretary Janet Yellen said last month that government oversight will be required as the cryptocurrency market is now reaching the size where it could introduce some level of systemic risk to the US financial system.

So is Coinbase going bankrupt?

Admitting that users would lose access to assets in the event of bankruptcy, is not the same as going bankrupt, although sometimes these things can become a self-fulfilling prophecy. We think the possibility is very remote.  Digital assets are here to stay, regardless of recent price performance and hysterical reporting in the mainstream financial media. Coinbase is now in fact looking oversold. We note that (in)famous ETF fund manager Cathie Wood was buying stock yesterday. Savvy investors can see a bargain here. We think the $450 price mark was a result of the hype with which Coinbase came to the market, but now serious investors can start to evaluate the stock from a more realistic perspective.

Related

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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