Coinbase Global, Inc. (NASDAQ: COIN) has been one of the best performers in the market’s risk-on/short covering/meme stock rally so far in 2023, jumping over 40% just since the end of 2022. Aside from the broad market tailwinds just noted, investors have embraced the company’s recently announced plans to cut 20% of its staff (amounting to around 1,000 employees), and the recovery rally in all cryptocurrencies over the first two weeks of 2023.
Remarkably, investors seem to have ignored Coinbase’s linkage to the January 12 news that the SEC has charged two digital asset trading firms, Gemini and Genesis, with offering and selling unregistered securities to retail investors, a very serious allegation. Gemini was founded by the Winklevoss twins, and Genesis is owned by Barry Silbert’s Digital Currency Group. Under the U.S. Securities Act of 1933 (1933 Act), the mere offer to sell an unregistered security to an investor can be a felony, subjecting the offering person to a federal prison term of five years.
The SEC contends that Genesis loaned its users’ crypto assets to Gemini at an attractive interest rate and sent a portion of the profits back to Gemini. Gemini also deducted an agency fee in the vicinity of 4%. Genesis would then return the remaining profits to its users. Per the SEC, Genesis should have registered this product as a securities offering.
The SEC action against Gemini and Genesis has relevance for Coinbase because of a July 2022 civil suit the SEC brought against three men, one a former Coinbase manager. The suit contends that nine cryptocurrencies, including seven that can be bought and sold on Coinbase’s platform, are actually securities that should have been registered with the SEC under the 1933 Act. The SEC believes they are securities because “each of the crypto asset securities were offered and sold by an issuer to raise money that would be used for the issuer’s business.”
The SEC civil suit remains outstanding, and no significant developments have been announced since the summer. Nevertheless, the SEC’s action against Gemini and Genesis increases the risk that it brings a similar action against Coinbase.
Like its stock price, the price of Coinbase’s bonds has also risen over the past two weeks, but on a much more muted basis. Coinbase’s 3.625% coupon bond which matures in 2031 trades at a price of 53.76 with an implied yield of 12.9%. This represents an improvement from a low price in the 49 range, with a yield above 14%, in early January. However, the rally only brings the bond price and yield back to mid-December 2022 levels. About US$3.4 billion (principal amount) of these bonds are outstanding.
Investors should be cautious about establishing positions in Coinbase stock at current levels. Its cash flow is deteriorating quite rapidly, and the stock market appears not to have discounted a significant increase in its legal risk.
Coinbase Global, Inc. last traded at US$49.98 on the NASDAQ.
Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.