Coinbase’s Discounted Bonds Offer Snapshot of Crypto’s Cash Conundrum

Wall Street, they say, is a voting machine — and then over the longer term it’s a weighing machine.

That sentiment guides value investing, an approach where investors try to assess the intrinsic value of a business. Ideally, they strive to buy stocks or bonds that are selling at a discount to a firm’s actual worth, and profit once the market catches up.

As to the voting: Companies may be wildly popular for a time (that’s the voting), promising some disruptive way of doing things. Popularity waxes and wanes, but ultimately, value wins out.

We may be seeing a classic “voting/weighing” dynamic playing out in crypto-land, crystallized in Coinbase’s stock and bond trading.

As noted by The Wall Street Journal, Coinbase has been hit hard in the stock market, like many crypto firms, caught up in the wake of the FTX implosion. But the fact that the company’s bonds are trading at about little more than cents on the dollar signals that investors don’t think there’s enough “there” there to bringing in the cash to meet its financial obligations, namely, interest payments.

To make interest payments, of course — which are a real and ever-present obligation and cost of doing business, and a cash outlay, Coinbase, like any other firm, has to have cash coming into the coffers. No easy task, not in this environment. Not even for the exchanges like Coinbase that, theoretically, provide the necessary conduits to keep crypto viable — and that should see top-line torque no matter whether traders are buying or selling.

Trouble Behind, Trouble Ahead

The latest earnings results spotlight the challenges. As reported by PYMNTS, the company had seen its revenue cut in half from Q3 2021, with the current quarter’s revenue of $590 million well below the $654 million analysts predicted. Users continue to decline, down half a million year over year in the most recent quarter to 8.5 million. The company is targeting an EBITDA loss of $500 million, according to reports. EBITDA, we note, is a rough measure of cash flow, and represents earnings (or a loss) before interest payments (that’s the “I” in the acronym).

CEO Brian Armstrong repeated his previous comments that the company expects losses in down markets and plans to continue to invest through them, noting that in 2021, “we did roughly $7 billion in revenue and $4 billion of positive EBIDTA” and is shooting for a $500 million EBIDTA loss this year. The company’s most recent SEC filings show negative operating cash flow of $4.8 billion through the first nine months of this year.

All of this, of course, is in the rearview mirror, and the end of September seems long ago and far away, before FTX blew up. Things have just gotten harder since. Transaction fees have represented about two-thirds of the consolidated top line. The company has come out in recent days and stated that it has no real material exposure to FTX or to the beleaguered FTT token.

But in a business where trading is oxygen, it may be the case that investors/traders who have been caught in the FTX web are underwater to the point where they are scrambling to extricate themselves from the web (maybe on other exchanges) and so the ripple effect is a dampening of trading on Coinbase’s platform — all of which, eventually, may translate into a cash crunch. FTX’s contagion may be felt in crypto enthusiasts’ curbing their enthusiasm for a long, long while.

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