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Crypto Exchange

Coinbase Listing’s Biggest Risk Factors: Another Crypto Winter

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  • Coinbase released its S-1 filing on Thursday in advance of its direct listing on the Nasdaq.
  • The filing has a lengthy Risk Factors section, including the volatility of crypto assets—but also some surprises, like negative social media chatter around crypto.
  • Coinbase also warns of its outsized reliance on trading fees from Bitcoin and Ethereum more than any other coin.
Coinbase, the biggest US cryptocurrency exchange, posted its S-1 filing on Thursday morning ahead of its upcoming milestone direct listing on the Nasdaq. The filing revealed $322 million in profit in 2020 compared to a loss of $30 million in 2019, stark proof of how well Coinbase has fared from the recent Bitcoin bull run, and numbers that are sure to strengthen the appeal of COIN shares when they debut.

The S-1 filing is also a chance for the public to get a look under the hood of a still-private, soon-to-be-public company and see not only its financials, but also how the company defines itself—as well as the risk factors it’s legally bound to disclose in full to potential investors.

Casper, the online mattress company, declared itself in its S-1 “a pioneer of the sleep economy.” It also warned that its heavy use of social media influencers could “materially and adversely affect our reputation or subject us to fines or other penalties.” WeWork infamously boasted, “Our mission is to elevate the world’s consciousness.”

Coinbase’s laser focus on profit

Coinbase is a crypto exchange. There’s no Coinbase side business in a totally different industry (a la Uber Eats at the time Uber went public). It’s laser-focused on enabling the trading of crypto assets—and making money from it. CEO Brian Armstrong made that crystal clear in his controversial public memo in September about Coinbase’s (lack of) politics: “We are a for-profit business,” he wrote. “We shouldn’t ever shy away from making profit, because with more resources we can have a great impact on the world.”

And so, unsurprisingly, Coinbase’s S-1 prospectus summary doesn’t have any weird surprise labels. It declares: “Coinbase powers the cryptoeconomy… a more fair, accessible, efficient, and transparent financial system for the internet age that leverages crypto assets: digital assets built using blockchain technology.”

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Potential pitfalls

What the S-1 does have is an extremely long Risk Factors section, a laundry list of possible pitfalls in the cryptoeconomy that could hurt Coinbase shares once they are public traded. Most of the risks are about volatility in the market, and public perception of Bitcoin.

“All of our sources of revenue are dependent on crypto assets and the broader cryptoeconomy,” the filing warns. “Our operating results have and will significantly fluctuate due to the highly volatile nature of crypto.”

Coinbase discloses that average Crypto Asset Volatility on its platform increased 73% from Q4 2019 to Q1 2020, then fell 36% from Q1 2020 to Q2 2020.

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Crypto investors are used to these fluctuations, but traditional Wall Street investors are not. And the non-crypto macroeconomic factors that concern Wall Street also matter to Coinbase, such as “interest rates and inflation” and “monetary policies of governments, trade restrictions, and fiat currency devaluations.”

Interruptions or outages to third parties that Coinbase uses can also adversely affect its business, and Coinbase points to one hyper-recent example from… yesterday. “On February 24, 2021, the U.S. Federal Reserve’s payments network experienced an outage, which had the potential to result in reduced functionality for certain of our products.” Indeed, when the Fed’s system went down on Wednesday, Bitcoin fans were quick to rush to social media to declare that the Bitcoin blockchain never “goes down”—but many crypto exchanges did go down because of the Fed outage.

The company also warns of its reliance on the largest two coins by market cap: BTC and ETH. “A majority of our net revenue is from transactions in Bitcoin and Ethereum. If demand for these crypto assets declines and is not replaced by new demand for crypto assets, our business, operating results, and financial condition could be adversely affected.”

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The threat of crypto crashes

Most of all, another crash like the one in February 2018 that followed the 2017 surge, when Bitcoin fell back by 65%, would, obviously, be very bad for Coinbase. The company makes clear reference to that event: “In 2017, the value of certain crypto assets, including Bitcoin, experienced steep increases in value, and our customer base expanded worldwide. The increase in value of Bitcoin from 2016 to 2017 was followed by a steep decline in 2018, which adversely affected our net revenue and operating results.”

And there are other risks Coinbase discloses that aren’t about the price of coins or the broader economy. One big area is regulation. Coinbase stock could be affected by “changes in the legislative or regulatory environment, or actions by governments or regulators, including fines, orders, or consent decrees” and “regulatory changes that impact our ability to offer certain products or services.”

Perhaps most interestingly, Coinbase warns possible investors of the changing perception of Bitcoin. It lists as risk factors: “negative publicity and events relating to the cryptoeconomy,” “unpredictable social media coverage or ‘trending’ of crypto assets,” and “unfavorable media coverage.”

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Indeed, despite so much recent buy-in from publicly traded companies like PayPal, Square, and Tesla, and despite a change in tone from many influential Wall Street hedge fund managers, Bitcoin still has a long way to go in its public reputation and image with Joe Main Street—and continued headlines about price volatility or cybercrime could hurt that image, and in turn, send Coinbase shares lower.

 

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Crypto Exchange

Genesis tests end-of-day pricing for institutional crypto futures product

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Cryptocurrency brokerage firm Genesis Global Capital has announced the completion of a first-of-a-kind trade that will pave the way for new institutional crypto futures products.

Genesis has executed the first-ever over-the-counter (OTC) block trade of a Basis Trade at Index Close (BTIC) transaction using Bitcoin futures contracts issued b Chicago Mercantile Exchange (CME). The trade was made in collaboration with derivatives market maker Akuna Capital according to a Sept. 26 announcement.

This is the first time a BTIC has been used for cryptocurrencies as it is more commonly used in equities markets. This form of trading allows investors to buy and sell futures contracts with prices based on the end-of-day close of the index.

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CME Group Global Head of Equity Index and Alternative Investment Products, Tim McCourt, said that the product was the next step in offering greater exposure to CME’s Bitcoin derivatives and Ethereum futures, with the Ether contracts having launched in February. He elaborated on the advantages of this new trading vehicle, explaining:

“BTIC enables market participants to more efficiently trade the basis while providing a regulated marketplace for real-time price discovery and enhanced trading precision for institutional participants who want to optimize holdings between the futures and spot markets.”

Genesis provides liquidity to CME Group for its BTC and ETH futures and options products.

In May, the CME launched micro Bitcoin futures which are contracts worth 0.1 BTC. The offering was designed to allow institutional traders to hedge their risks to crypto assets.

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By the end of June, the product had surpassed a million traded contracts suggesting that there is a high demand for smaller positions in crypto among institutional investors still testing the waters. This latest product is another example of diversifying the options for well-heeled investors to gain exposure to crypto markets.

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Crypto Exchange

Huobi outlines plan for Chinese investors after halting crypto trading

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The uncertainties sparked by China’s blanket ban on crypto trading have taken a downturn as homegrown crypto exchanges such as Huobi take proactive measures to protect and return existing investments residing on the mainland. 

Speaking to Cointelegraph in this regard, Du Jun, co-founder of Huobi Group, said that the crypto exchange wants to ensure the safety of the users’ assets as part of its social responsibility:

“Customers will be able to transfer their assets to other exchanges or wallets over the next few months. Specific measures and operating rules will be outlined in future announcements.”

Citing a possibility of a communication gap with Chinese investors amid the ban, the crypto exchange is also working on other ways to protect customer assets until the users can move them to offshore exchanges or wallets.

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Chinese investors amounted to more than 30% in terms of trading volumes prior to the crypto ban, but as Jun suggests, Huobi has seen increased adoption in the Southeast Asian and European markets. However, the exchange expects that “any short-term impact on Huobi revenues will be mitigated as our global business continues to grow.”

While observing the ban on crypto trades and mining as imposed by the People’s Bank of China and other Chinese regulatory authorities, Jun plans to double down on Huobi’s compliance efforts and continue to build compliant operations on a global scale.

Crypto exchanges in mainland China, including Huobi, began stopping new customer registrations soon after a new crypto ban became effective on Friday. Huobi later announced that all Chinese accounts from the mainland will have been closed down by 24:00 UTC+8 on Dec. 31, 2021. 

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Historically, China has been responsible for the lion’s share of Bitcoin (BTC) mining. Given the lack of support from the ruling government, Chinese miners have continued to move off-shore into crypto-friendly jurisdictions.

According to a recent Cointelegraph report, the latest ban marks the Chinese regulators’ 19th attempt to curb Bitcoin and cryptocurrencies in the past 12 years. While the decision to ban crypto trades in China caused a few unwary investors to momentarily panic-sell, Bitcoin’s price continues to show bullish signals, given the proactive support from crypto exchanges and users across the globe.

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Binance

Binance Suspends Spot Trading and Fiat Channels in Singapore

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Binance.com, the global cryptocurrency exchange platfrom announced the suspension of spot trading, fiat purchase channels, liquid swap, and fiat deposit functions. The suspension would come into effect from 26th October. The exchange also requested Singapore users to withdraw their tokens and cease their trades by the effective date. The exchange in its official press release said,

“As the market leader, Binance constantly evaluates its product and service offerings. We will be restricting Singapore users in respect of the Regulated Payments Services in-line with our commitment to compliance. Users in Singapore are advised to cease all related trades, withdraw fiat assets and redeem tokens by Wednesday, 2021-10-26 04:00 AM UTC (12:00 PM UTC+8) to avoid potential trading disputes.”

Binance’s trouble in Singapore began after the Securities Commission in the country put Binance.com under Investor Alert List. In the wake of the first regulatory action, Binance ceased certain product offerings in the country before suspending key crypto trading features altogether. It is also important to note that Binance’s Sister company in Singapore has applied for a regulatory license and has been granted an exception until a decision is made on its filing despite the global platform facing regulatory scrutiny.

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Binance Continue to Face Regulatory Setbacks

Singapore was considered to be the next home for Binance after facing regulatory scrutiny from nearly a dozen countries. However, the recent series of events suggest Singapore regulators are also going after the global exchange despite harbouring its sister company. The world’s leading exchange’s regulatory troubles seem to meet no end as more countries continue to enforce action against it.

The crypto exchange has taken several decisions to mend its ways with regulators over the past couple of months, right from suspending derivative offerings in several countries to on-boarding regulatory experts. However, that hasn’t changed much, now the crypto exchange plans to establish a centralized headquarters and also looking for a change of CEOs if that can help.

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