Zerodha co-founder Nithin Kamath has cautioned Indian investors against the prospect of US cryptocurrency exchange Coinbase Global on Twitter.
Coinbase, the largest crypto exchange in the US, saw its shares tumble 78% since its April 2021 initial public offering (IPO). The cryptocurrency brokerage reported a first-quarter loss this week as revenue fell 27% from a year ago, missing estimates. Coinbase reported a $430 million net loss in the first quarter, or $1.98 per share, on declining sales and active users.
As a result, Nithin Kamath again took a jibe at the cryptocurrency market and claimed that customer assets could be at risk in case of bankruptcy of Coinbase.
He advised Indian crypto investors to be aware of Coinbase’s dramatic fall, and added “crypto with exchanges carry a risk”.
“Coinbase latest filing: Customer assets could be at risk in case of bankruptcy. Indian crypto investors on exchanges also need to be aware of this. Unlike the stock market where stocks are held in a demat with a depository & have no broker risk, crypto with exchanges carry a risk,” Kamath wrote on Twitter.
Coinbase Global, like the rest of the cryptocurrency market, is having a really tough week. Coinbase reported a $430 million net loss in the first quarter, or $1.98 per share, on declining sales and active users. Analysts were expecting profit of 8 cents per share. Revenue was down as trading volumes fell, and active monthly users declined 19% from the fourth quarter.
Not filing-for-bankruptcy bad, but the biggest US crypto exchange did just mention the B-word in a regulatory filing, giving its customers a painful reminder of how bad things could get for them if Coinbase ever does get seriously distressed.
In its quarterly report, Coinbase added a risk disclosure: if the company were to file for bankruptcy, the court might treat customer assets that the exchange is a custodian for — their Bitcoin, Dogecoin, or whatever — as Coinbase’s assets. And they’d be at the back of the line for repayment, forcing normal people, unaccustomed to the ins and outs of federal bankruptcy court, to claw back their money along with everybody else owed money by the exchange.
Coinbase was custodian for $256 billion of customer money on March 31, according to the filing. Chief Executive Officer Brian Armstrong quickly took to Twitter to elaborate, saying the company is not at risk of going bankrupt and that users’ funds are safe.
US courts have not yet dealt with the bankruptcy of a cryptocurrency exchange. However, the so-called general unsecured creditor will be the last to recover money. Ahead of them would be senior debtholders — Coinbase has $2 billion of senior unsecured bonds outstanding — along with the lawyers and bankers that help any company navigate bankruptcy, racking up potentially huge bills along the way.
Users would need to fill out paperwork demanding what they’re owed, file it on time and potentially wait months or years for payout. Often, low-ranking creditors are left with pennies on the dollar.
Coinbase’s bonds due in 2028 and 2031 have both tumbled below 70 cents on the dollar this week — far from brink-of-bankruptcy levels, but in line with some of the riskiest high-yield debt in the market.