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Coinbase Melting Down Amid the Great Crypto Deflation

Image by 愚木混株 Cdd20 from Pixabay

Despite the ongoing global heatwave, the crypto industry is in for a harsh winter. But, the United State’s largest crypto exchange, Coinbase, is settling for even jarring conditions.

Last Tuesday, Coinbase reported a massive decline in activities on its platforms for the first quarter (1). It was before the price drop of major cryptocurrencies this month, including Bitcoin (2).

The company has revealed a 430 million USD earning loss in its Q1 and witnessed a 19% drop in its users. Its monthly transacting users sled over 2 million from the Q4 of last year to the Q1, to 9.2 million. It saw a 44% drop in its trading volume, leaving the total transaction revenue 56% less. The crypto volatility has continued to decline into April, hitting its lowest level since the mid-2020.

coinbase revenue
Image: WSJ

The company warns that its numbers could plummet further in Q2 if the crypto market woes continue. It seems that the company has long anticipated a possible deep freeze period in the crypto activity.

Brian Armstrong, Coinbase’s Chief Executive (3), stated on the company’s earnings call earlier this week that Coinbase has been through crypto cycles in the past, and he looks at it as an opportunity to focus on “building for the future” instead of scrambling to keep up with the market frenzy.

“Ironically, I have never been more bullish on where we are,” said Armstrong.

However, users are concerned that Coinbase could revoke access to their digital holdings if the downturn prevails.

It is not Coinbase alone; most crypto exchanges in the US have suffered a downturn. Though Binance International witnessed an unpick in its volume last month, its US-focused businesses experienced a steeper decline than Coinbase.

US crypto exchnages
Image: Bloomberg

With the global economy’s current volatility, we believe the cryptocurrency needs regulation to stay afloat.

Read Also: Amid the Crypto Crackdown, Meta Develops Zuck Bucks

A Major Sell-Off in Crypto Market

The crypto market is witnessing a crash amid a massive sell-off. As of Thursday, Bitcoin is below the 27k USD level, down 8.76% to 26,848.20 USD, as per the data from Coin Metrics. Ethereum also dropped over 13% to 1,832.33 USD.

After the Bureau of Labor Statistics reported an 8.3% jump in consumer prices for April, which was slightly higher than expected (4), the stock market fell, with cryptocurrencies following the suit.

The report startled investors, prompting them to exit high-risk assets, including crypto. Cryptocurrencies have long remained highly correlated with the S&P 500, more recently, the Nasdaq Composite.

bitcoin price
Source: CNBC

The cryptocurrency market has recently been under pressure. The Fed keeps hiking, leading to a drop in equities, taking crypto along with it. And it has built a lot of fear in the market,” said Michael Rinko, a venture associate at AscendEx (5).

Bitcoin has fallen below the 29k USD range twice this week. Analysts call 30k USD a key level for the largest cryptocurrency in terms of market cap and asserted that it could drop even further if it fails to hold there.

Last week, Bitcoin had managed to touch a recent high of 40k USD (6). However, it reversed the next day and has been on a steady decline since.

Investors are also alarmed by the Terra Project breaking its 1 USD peg. Last week, its stablecoin TerraUSD crashed almost 100% (7). The decentralized, algorithmic stablecoin is backed by multiple digital assets, including Bitcoin.

Read Also: Crypto Fear, Greed Index, Protection Against Wild Swings

Coinbase Concerns

On the heels of this market butchering, the announcement of Coinbase witnessing a 27% revenue drop has triggered a 26% decrease in its share prices (8).

Its total trading volume has already dropped from 547 billion USD in Q4 to 309 billion USD. Though the platform still holds over 256 billion USD in both fiat currencies and cryptocurrencies on behalf of its investors, a new statement in the company’s term has garnered attention.

In the event the crypto exchange faces bankruptcy, its users may also lose all the cryptocurrencies stored in their accounts.

“If it ever declares bankruptcy, the crypto assets we hold in custody on behalf of our investors could be subject to bankruptcy proceedings. Coinbase users could become ‘general unsecured creditors.’ Meaning, they don’t have the right to claim any specific property from the exchange in proceedings, and their funds would become inaccessible,” noted the exchange (9).

Now, that should not happen.

One of the key selling points emphasized by blockchain evangelists everywhere is that an individual’s ownership of Bitcoin is meant to be unchangeable and absolute. However, when a user registers a Coinbase account, they frequently end up putting their crypto holdings in a Coinbase-controlled wallet, implying that the customer relinquishes some control over their funds.

A private key is a long alphanumeric string that governs access to a cryptocurrency wallet. You cannot access your wallet with this key. However, Coinbase stores the private key and allows users to access it with a password instead. The move aimed to make the configuration easier so users could access their accounts with easy-to-remember, simpler, traditional passwords.

Yet, it also means that Coinbase is the ultimate controller of whether a user can access those assets. Coinbase also offers a self-custody wallet, called Coinbase Wallet, in which users have their private keys.

However, since Coinbase has admitted that crypto assets are not secure in the event of a bankruptcy, it highlighted a major difference between storing your assets in blockchain exchanges and keeping cash with traditional financial institutes.

It also shines the light on the debate over who holds the key to crypto wallets.

Read Also: Big Techs are Marking an End to Passwords

Access to Crypto Assets

If Coinbase faces bankruptcy, crypto assets held by Coinbase could become subject to bankruptcy proceedings, and it could treat customers as unsecured creditors. And because crypto-assets don’t have the same protections from exchanges for equities, investors should maintain the custody of their coins independent of any exchanges.

It also means regulators can define crypto assets as securities instead of currencies to protect investors (10). Analysts are also comparing the recent downtrend in the crypto market to the deflation of the dot-com bubble. Only a few projects will survive this great crypto deflation if that’s the case.

“I believe we had a lot of new entrants who were excited about this but didn’t necessarily have a grasp of the basics early on, and I think the cooling is a reflection of that,” said Jordan Birnholtz, co-founder of NFT marketplace Neon (11).

Millionaire Gary Vaynerchuk, an early investor in businesses such as Facebook, Twitter, Uber, Snap, and Venmo (12), told MarketWatch in July 2021 that he, like Cuban, believes NFTs and crypto would follow in the footsteps of the early internet companies in the late 1990s.

“I see NFTs the same way I saw the internet in 1999. Prematurely, internet stocks and values went over the roof, and many things fell apart. Meanwhile, eBay, Google, and Amazon were all present.”

Last January, Cuban said something similar in a now-deleted tweet. “It’s EXACTLY like the internet stock bubble watching the cryptos trade.” He wrote. “I believe BTC, ETH, and a few others will be equivalent to companies like Amazon, eBay, and Priceline, founded during the dot-com period, survived the bubble, and flourished. Many will not.”

We believe only a few projects will survive this great crypto deflation if that’s the case. There could be no better movement for regulators to come than now and safeguard investors from rug pullers and profit-takers on the way down.