As Coinbase stock (NASDAQ: COIN) plunged to a new all-time-low this week, a veteran credit market analyst has revealed he believes the cryptocurrency exchange could be heading toward “what looks to be insolvency”.
The credit analyst is none other than Dr Marco Metzler, one of the earliest exerts to publicly express concerns about the demise of Chinese property giant, China Evergrande.
Metzler was so certain Evergrande’s defaults were being covered up, he bought the company’s bonds to prove its debt oblations weren’t being met.
Now he’s got a new hunch, and it involves the United States’ largest cryptocurrency exchange.
Coinbase default signals appearing in bond markets
Bonds issued by Coinbase have been decimated in the recent weeks. While many think they are simply a casualty of fear in the sector, following the FTX collapse, Metzler believes there could be bigger problems brewing beneath the surface.
“Bond prices indicate that the market is pricing in a possible default of Coinbase,” he says.
“Coinbase has $2 billion in outstanding bonds which is concerning. They will have to be paid even if the company is not doing great at the moment.”
And Metzler warns if those outstanding bonds can’t be paid, cryptocurrency investors who use the exchange could be impacted.
“Insolvency proceedings will freeze crypto transactions which prevent purchases and selling. General unsecured investors and or customers are the last individuals that will be able to recover their investments. Some will be only paid pennies on the dollar.”
Coinbase bonds have traded as a low as 50 cents on the dollar in recent days, with implied yields skyrocketing to above 15%.
“This is proof that investors are unsure if their investments are safe with a crypto company that is on the rope, especially because the crypto scene has seen a lot of turmoil,” added Metzler.
Coinbase had around $5 billion in cash and $3.4 billion of long-term debt at the end of the third quarter of FY 2022.
Coinbase stock downgraded
Along with the Coinbase bond market turmoil, Coinbase stock has plunged by more than 85% since its listing in April 2021.
On Friday, analysts from Mizuhu Bank became the latest to downgraded Coinbase stock, moving its outlook to ‘underperform’ from ‘neutral’, while also cutting its price target from $42 to $30.
Coinbase stock price, at the close of trading on Friday, was just above $40.
Mizuhu’s concerns for Coinbase centre around a deal with peer-to-peer payments technology company, Circle. Circle is the issuer of a stablecoin known as USD Coin or USDC.
It’s understood Coinbase shares interest income earned on U.S. dollars that are held in reserve to back the USD Coin. Dolev predicts that revenue from Circle’s U.S. dollar reserves account for some 10% – 15% of Coinbase’s total revenues.
The bank warns should Circle attempt to re-negotiate the terms of the deal with Coinbase in 2023 or should the stablecoin encounter any unforeseen problems, Coinbase will see a significant impact on its revenue.
“Our assessment of consensus estimates for interest income for COIN suggests that the Street is underestimating the potential risks,” said Mizuhu Managing Director, Dan Dolev.