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Analysts from Moody’s and JPMorgan hailed the exchange for its strong reputation but said it wouldn't be enough to solve its profitability woes.
Cryptocurrency exchange Coinbase won’t escape from the profitability challenges it will face from the crypto market downturn, despite having a strong brand and credibility in the crypto market, according to investment analysts.
Credit rating firm Moody’s released a note on Coinbase on Jan. 19 discussing its downgrade of Coinbase’s senior debt and corporate family rating (CFR) — a rating assigned to reflect the opinion of a company’s ability to honor its financial obligations.
Coinbase’s CFR and senior debt were re-graded to B2 and B1 from Ba3 and Ba2 respectively, indicating the firm is “non-investment grade” and “speculative and subject to high credit risk” according to Moody’s.
The firm noted that Coinbase is suffering from “substantially weakened revenue and cash flow generation” due to “challenging conditions,” specifically depressed crypto prices and lower trading activity.
The market conditions saw Coinbase lay off 20% of its employees, around 950 people, on Jan. 10, its second wave of recent major layoffs following its June 2022 18% headcount slash in a bid to cut cos
However, despite Coinbase’s bid to preserve liquidity, Moody’s still expected “the company’s profitability to remain challenged.”
The bankruptcy of its crypto exchange peer, FTX, is a cause for heightened concern and uncertainty regarding crypto regulation according to Moody’s.
It said a sudden move by regulators in the crypto industry could negatively impact Coinbase’s revenue through increased costs of regulatory compliance.
Moody’s added, however, that increased oversight “could ultimately favor the relatively more mature and compliant crypto-asset platforms such as Coinbase.”
Meanwhile, a separate note from analysts at JPMorgan argued that Coinbase’s credibility and reputation in the industry have strengthened after recent collapses.
“While the crypto-ecosystem has suffered further meaningful credibility issues, Coinbase has emerged with its credibility and brand strengthened — at least relatively."
The financial firm's analysts which maintained a rating of “neutral” for Coinbase in its latest note said Coinbase could even be a “beneficiary of the challenges” other exchanges have faced in the wake of FTX.
The upcoming Shanghai hard fork for the Ethereum blockchain could also be a positive for the exchange according to JPMorgan’s analysts.
Related: Coinbase stops Japan operations amid trading slump
The upgrade “could usher in a new era of staking for Coinbase” with analysts estimating 95% of retail investors on the platform may stake Ethereum post-upgrade, netting Coinbase up to nearly $600 million a year.
On Jan. 6 the Coinbase share price hit an all-time low of $31.95 after over a year of constant price declines according to Yahoo Finance data. The day prior, veteran investor and ARK Invest CEO, Cathie Wood, loaded up on $5.7 million worth of Coinbase shares.
Since then the share price of Coinbase and other crypto-related companies have surged.
Coinbase gained 72.6% since the Jan. 6 low and traded at over $55 at the close of market on Jan. 20, where it saw an 11.6% gain on the day.
Galois Capital, New Huo Technology, and Nestcoin are just some of the crypto firms with funds stuck on FTX as the exchange undertakes bankruptcy filings in the United States.
The collapse of the cryptocurrency exchange FTX continues to have knock-on effects throughout the crypto industry with multiple crypto-focused companies reporting significant amounts of their capital stuck on FTX.
Between Nov. 11 to 14 three crypto companies announced large losses with one of them having to lay off workers to deal with the crisis.
On Nov. 11, crypto hedge fund Galois Capital announced it had “significant funds” stuck on FTX, with a Nov. 12 Financial Times report that said a possible $50 million worth of Galois’ assets were stuck on the exchange.
Other crypto-focused companies have reported their funds arestuck on the now-bankrupt exchange.
New Huo Technology, the owner of the Hong Kong-based crypto platform Hbit Limited announced on Nov. 14 it failed to withdraw $18.1 million worth of cryptocurrency before FTX stopped processing withdrawals.
$13.2 million of this loss are digital assets owned by Hbit users with the company saying it would continue to take steps to “withdraw the cryptocurrency as soon as possible,” bit admitted due to FTX’s bankruptcy filings the crypto “may not [be] able to be withdrawn from FTX.”
According to the announcement, Li Lin, the controlling shareholder of the company and founder of the Huobi crypto exchange agreed to loan up to $14 million to the company for it to use in processing withdrawals. However, the company does not yet know what the financial impact of FTX’s bankruptcy will be if it is never able to withdraw the funds.
Nigerian Web3 startup Nestcoin also announced it failed to withdraw funds from FTX with the company’s CEO, Yele Bademosi, posting to Twitter on Nov. 14 a letter previously shared with investors.
The letter detailed that Nestcoin will lay off workers “as we held our assets (cash and stablecoins) at FTX to manage our operational expenses” and it no longer has the funds to pay some staff.
An update shared with our investors earlier today on the FTX incident and its impact on @Nestcoin. pic.twitter.com/0Mjo4SYF7R
— YB (25,25) ⏳ (@YeleBademosi) November 14, 2022
Previously crypto data aggregator platform CoinGecko warned on Nov. 13 that layoffs across the crypto sector could increase in the coming months when the “full impact” of FTX’s sudden collapse takes effect.
Related: Will SBF face consequences for mismanaging FTX? Don’t count on it
On November 11, FTX said roughly 130 companies in its FTX Group including its United States entity FTX.US and sister trading firm Alameda Research declared they would file for bankruptcy in the U.S. after FTX suffered a liquidity crisis and was unable to process user withdrawals, leaving its customers without access to their funds held on the exchange.
Its Bahamas-based subsidiary, FTX Digital Markets had its assets frozen by the local securities regulator on Nov. 10 and liquidators appointed to safeguard its funds while the bankruptcy proceedings are undertaken.