[graeme]

> They have zero risk of this kind of insolvency, their only risk is people stop using them to trade.

US regulated companies can, in fact, go bankrupt, and frequently do. They can also misuse funds or make foolish decisions that cause them to to under even if customers keep using them.

There is even have a system for scoring this risk, called the Altman Z score. A good score is above 3. A grey zone score is 1.8-3.0.

Coinbase’s current score is 0.15!

In the distressed zone with serious possibility of bankruptcy within the next two years.

https://www.gurufocus.com/term/zscore/COIN/Altman-Z-Score/CO...

Anyone who disagrees with this solvency risk assessment is free to purchase some of their outstanding bonds. Their bond coming due in 2028 goes for 53 cents on the dollar.

If they don’t go bankrupt, you’ll double your money in five years. A yield of 13.3% per year!

https://markets.businessinsider.com/bonds/coinbase_global_in...

[RC_ITR]

I don’t want to cite Dunning-Kruger, but Coinbase’s core business model (if you looked at their balance sheet as I suggested) leads to them segregating customer assets from everything else (there’s a special line with a footnote and everything). Those assets line up exactly with the liability line for deposits.

If you’re even a little bit familiar with bankruptcy law, you know that those depositors are the top of the stack (by a mile) and part of the reason Coinbase scores so low on those tests you cite is because the customer deposits get ignored (since they legally can’t touch them).

This is different from A) FTX which lent out those customer deposits irresponsibly and B) Thinking they are a good business whose corporate debt I want to buy.

Like I said in my original comment, that’s a stupid/weird business model that no one else follows because it’s so stupid and weird!

It’s also based on a Ponzi scheme!

But anyway…

[graeme]

Coinbase has those assets listed nice and separately but that is unlikely to hold up in bankruptcy court.

SEC specifically forced Coinbase to disclose the following:

“ "Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors”

“Deposits” legally are a banking term and coinbase is not a bank.

The money given to Coinbase is more akin to a gift card balance. Starbucks segregates customer gift balances on its balance sheet but if they go bankrupt gift card holders are in line with other unsecured creditors.

[RC_ITR]

1) I love the energy of taking a risk disclosure at more than face value (they are clearly speculating and write that because it is free to do so and it covers their asses, not because the SEC “forced” them).

Show me the precedent where bankruptcy courts considered depositors as general creditors, since you are so sure that’s what will happen.

2) Will you please please please read the balance sheet.

As a favor to me?

In it you will see that of Coinbase’s $105bn in liabilities, $101bn of it is owed to depositors. That is offset by $101bn of depositor assets.

So even in your worst case scenario, depositors get what, a <4% haircut?

I’d love to see the number of FTX depositors who’d take that deal rn…

EDIT: Maybe this will help. What’s special about Coinbase isn’t the fact that deposits are a line item on their balance sheet (FTX did the same), it’s that Coinbase actually keeps the assets.

So whereas FTX not only lost solvency in its core business, it also lost solvency in deposits, Coinbase can only lose solvency on its core business, which is minuscule relative to the scale of deposits.

[graeme]

Alright so I read the balance sheet:

1. The numbers you refer to are from the unaudited quarterly report

2. The last audited numbers are from their annual report, end date Dec 2021, during the tail end of bull market

3. $95 billion of the assets on the balance sheet are crypto assets. This is an unaudited figure, but there is no obligation to hold crypto 1:1 from what was deposited

4. Concentration of credit risk was a significant risk listed. This would apply to non insured funds at banks in excess of $250,000 and they also face risk of Tether or USDC imploding. We do not know the composition of their crypto assets. About 1/3rd of their audited crypto assets are classed as “other”

There’s plenty of room there for saying “I am shocked, shocked that our assets were not redeemable at market value en masse in the flash crash”

We’re talking about a company which has been repeatedly and publicly slapped by the SEC, in an industry full of accounting fraud, in a bear market, and which the markets rate as highly distressed.

Perhaps they risk criminal prosecution for missteps, but there are plenty of examples of that not being sufficient deterrent, of companies trying to dig themselves out of a hole.

You were referring to their unaudited 2022 balance sheet correct? I am not an expert so please tell me if I have missed something

[wmf]

The point is that if Coinbase goes bankrupt their customers will not lose any money because customer assets are segregated from Coinbase's assets.

[iseeyou]

  Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors

https://finance.yahoo.com/news/coinbase-warns-customers-coul...

[RC_ITR]

>may

There’s no precedent. Disclosures are always worst case scenarios

And again, will anyone please read their fucking balance sheet?

Liabilities of $105bn, $101bn which are deposit liabilities vs. $101bn of customer assets.

Even in a worst case scenario depositors get a <4% haircut.

THIS IS VERY DIFFERENT FROM WHAT FTX DID