May 11, 2022 | Issue #219

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Another Crypto Market Crash?

Well, alrighty then. Since we wrote our last issue, the crypto market has been in a nasty tailspin. Both bitcoin (BTC) and ether (ETH) are down roughly 25% in 7 days. In fact, at the time of writing, BTC is hovering around $29k, its weakest level since July 2021.

There's really no way around it – the markets are in pretty bad shape right now. But as always, there still is some light at the end of the tunnel.

The Bad?
As the macroeconomic environment continues to battle higher interest rates, almost every asset class has been struck with increased sell-side volatility. Unfortunately, bitcoin continues to be no exception to the rule. BTC continues to slide right along with U.S. equities, showing further evidence that the public views crypto very much as a risk-on asset. The proof is in the pudding too, so to speak. Since the beginning of 2022, BTC has moved inversely to traditional safe haven assets like gold.

The Good?
To be frank, there is no justification for the recent losses and we're aware that many investors have been hurt along the way. But from a fundamental stance, not much has changed.

For example, as Coin Metrics points out in their latest weekly report, BTC holders that bought over the last couple of years have resolutely kept their positions, with only 34% of total BTC supply moving in the last year. This means that 66% held for at least 1 year. In other words, the public's faith in bitcoin hasn't really resided despite the tumultuous market.

Furthermore, largely thanks to stablecoin, TerraUSD (UST), losing its peg (we'll talk more about this in the Deep Dives), billions of dollars have vanished from the market over the past few days, causing widespread panic throughout crypto's ecosystem. At the same time, however, both ETH and BTC have held up surprisingly well considering all that's happening.

And of course, we cannot forget everything that has led us to this point in the first place...

The dollar reserve is still in decline. The inflation dragon is out of its cave. DeFi will continue to innovate at a faster pace than banks. NFTs are still unlocking digital IP. And almost every asset class across the board is in shambles as of late. Crypto Twitter can call it a "crash" all they want, but they shouldn't forget to include just about everything else.

Coinbase Plummets on Earnings Miss

Yesterday, Coinbase (COIN) reported Q1 earnings for 2022.

Today, the stock is down more than 25%.

Shares of the company are now trading at less than $55, representing a loss of more than 85% since the company went public in August, 2021. Although the company explicitly warned in Q4 that users and trading volume would decline in Q1, investors still punished them this morning.

Here are the high level numbers:

• Revenue of $1.17 billion
• Expenses of $1.7 billion
• Net loss of $430 million
• Monthly transaction users of 9.2 million, a drop from 11.4 in Q4
• Adjusted EBITDA of $20 million, a drop from $1.2 billion in Q4

Expectations:
Let's just get this out of the way up front: analyst expectations for most companies are laughable and for crypto companies they are even more so.

For Q1, the Street had a target of $1.48 billion in revenue for Coinbase. So when the company reported a revenue number of $1.17 billion, investor's natural reaction was a huge miss on revenue.

Let us not forget though that in Q4 2021, The Street expected Coinbase to report $1.94 billion, when in reality it reported $2.5 billion, a more than $500 million beat.

As SBF rightfully asked: "What if earnings are roughly in line with the public marketdata they publish in real time? Will COIN still move? Did analysts bother looking at the marketdata?"

Profitability:
Now that we are done ripping on analysts, it is worth noting that Coinbase posted a more than $400 million loss in Q1. On face value, the loss is concerning, but on the earnings call Coinbase CFO Alesia Haas was quick to point out:

"We are highly confident that we could choose profitability over reinvesting in the business. However, we chose investment. As we shared with you last quarter, we are choosing to make 2022 an investment year... I do think it's really important that investors understand that we do have the ability to have the profitability, but we've consciously made the chance to focus on growth and diversification."

Although the company is insisting that they were planning on a large year of investing into the company, the slowdown in the crypto markets that we have seen over the past year definitely didn't help at all to offset these investments.

Share Buybacks:
On the earnings call, Pete Christiansen from Citi, asked a question that is on a lot of investor's minds right now which is whether the company would consider buying back stock at these depressed valuations.

Again, Alesia Haas responded stating that the company would rather use the cash on the balance sheet for growth (such as international expansion) rather than for dividends or buybacks.

Interestingly on the note of share buybacks though, today Galaxy Digital (GLXY) announced that the company's board has approved a bid to purchase 10% of the float as they believe shares are undervalued. The company's stock is down 80% off of it's highs.

M&A and Ventures: 
Longtime readers of CoinSnacks know that we have been begging for an update on the Coinbase's venture portfolio. Unfortunately, we will still be waiting. With that being said, Coinbase made a point in mentioning that they are looking intently at M&A targets, especially among their existing venture portfolio.

Valuation: 
Right now, Coinbase is trading at ~$12 billion market cap. To put that in perspective to other exchanges, that is less than FTX ($40 billion), Blockchain ($14 billion), and not far off from Kraken ($10 billion), and Gemini ($7 billion). And before you say those companies simply haven't repriced yet to match the macro environment, just yesterday we found out that Kucoin raised at a $10 billion valuation.

On top of that, Coinbase currently has $6-7 billion in cash or equivalents on hand, meaning that the company is only trading for around 2x cash.

With a potentially multi-billion dollar ventures portfolio, its getting more and more difficult for us to rationalize this valuation... even with the $400+ million quarterly loss.

On the earnings call, Brian Armstrong made reference to this point in stating that either the company's public valuation will have to rise, private valuations will have to drop, or both. If this happens, Coinbase is ready to pounce on acquisition targets.

Overall, we'd like to reiterate a point we made two weeks ago:

"Overall, the stock could have much more room to slide, but at some point, dependent on the macro market, crypto prices, and the company’s moves, the stock may just enter into a good buying zone."

Fortunes are made coming out of bear markets and right now Coinbase has the cash to weather a prolonged storm.

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 DEEP DIVES 

The UST Blowup

Oh yes, how could we forget...

In case you've been away from your computer over the past few days, the biggest story in crypto right now is the slow-motion disaster happening over at Terra, the company behind the stablecoin, TerraUSD (UST), and its secondary token, Terra (LUNA), which powers the Luna blockchain.

The Backdrop: 
Without getting into the nitty-gritty details, Terra had set up their stablecoin apart from the rest. Unlike longer-established stablecoins, such as those issued by Tether (USDT) and Circle (USDC), Terra was pegged to the U.S. dollar through an algorithm. Stablecoins like USDT, on the other hand, are pegged to the U.S. dollar through cash and cash equivalents.

What Happened?!
The short answer is well, we don't exactly know yet. All that we know for sure is that Terra's fancy algorithm appears to have fallen apart quicker than glass hitting a tile floor.

The end result has been an utter disaster. UST started losing its peg over the weekend and it has only gone from bad to worse. Terra's LUNA, which was designed to support the price of UST, has collapsed and is now trading down 93% over just the last 24 hours. UST, Terra's stablecoin, on the other hand, is currently trading for just 70 cents after falling as low as 30 cents over night.

It was only a week ago when UST and LUNA were both apart of the top 10 largest tokens by marketcap. Fast forward to today, and it appears they are fighting for their last breath.

As you can imagine, this has triggered a rippling effect across the entire crypto ecosystem and has single-handedly caused the market to panic. Rumors are spreading like wildfire, crypto funds are freaking out, regulators are calling for action, and investors are running for the exits.

It's a sad, sad day for the all the LUNAtics out there. And until we can get more clarity on the situation (and a clearer picture of what caused what), we're going to let this play out. Perhaps we'll cover it (and all the lessons learned) in next week's issue.

Compound Treasury Draws a Rating From S&P in Groundbreaking Move

The markets may look like a catastrophe at the moment, but that hasn't stopped DeFi protocols from integrating deeper into the world of traditional finance.

This week, Compound Treasury received a B- credit rating from the S&P Global Ratings, one of the Big Three credit rating agencies. This development constitutes the “first institutional decentralized finance offering to be rated by a major credit rating agency.”

So... What's Compound Treasury?
Compound Treasury is a product built by the team at Compound Labs – the same team that was an early mover in DeFi with their Compound (COMP) protocol. Compound has been used by hundreds of thousands of DeFi users to earn interest via lending/borrowing on over $120 billion of crypto assets.

In June of 2021, however, Compound Labs announced the launch of Compound Treasury. The treasury arm is designed for non-crypto native businesses and financial institutions to access the benefits of the Compound protocol.

Compound Treasury converts U.S. dollars to USDC, a stablecoin, which are then deposited into Compound Finance to earn yield as people borrow USDC. Businesses can essentially wire over USD to their Compound Treasury Account and are "guaranteed" a fixed interest rate of 4% per year.

Junk Bond Rating:
At a rating of B-, Compound Treasury’s offering is rated at the same level as a junk bond. Interestingly enough, that's puts them right in line with Coinbase's corporate bond ratings and other high-risk junk-rated notes. Yet, the fact that the Treasury product received a rating in the first place represents a big step forward in the integration of decentralized and traditional finance.

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 REGULATORY FRONT 

Germany Publishes New Tax Guide for Crypto

Germany's federal finance ministry (BMF) has issued new guidance around the tax treatment regarding crypto assets.

According to Parliamentary State Secretary Katja Hessel, bitcoin and ethereum will no longer be taxable after an individual holds them for more than one year.

In other good news for German citizens, the new guidance also covers mining, staking, lending, hard forks, and token airdrops under the same one-year rule.

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