Coinbase Global Inc had a terrible start to 2022, but can the NASDAQ-listed exchange bite back?

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Caymans-registered centralised exchange (CEX) Binance has overtaken US-listed competitor Coinbase as the largest holder of Bitcoin per any global exchange.

A graph posted by Blockware Solutions’ Will Clemente showed that Binance was steadily increasing liquid supplies of the largest cryptocurrency throughout 2022 before flipping Coinbase in the past week.

The “flippening” could be taken as a sign of increased public trust in Binance, which has so far avoided any major fallout from the crypto winter plaguing the crypto markets.

Coinbase, on the other hand, has had an objectively terrible first half, with freefalling share prices, large-scale workforce reductions, and controversy over custodial user funds.

Add to that a series of largely unfounded bankruptcy rumours, and Binance’s overtaking, though relatively innocuous on its own, could have come at a better time.

Coinbase’s BTC premium increases

But another recently disclosed statistic could make for better news at Coinbase HQ.

According to Marcus Sotiriou, analyst at the Toronto-listed digital asset broker GlobalBlock, the “Coinbase Premium Gap” has surged to positive values in the past week.

The Coinbase Premium Gap compares the price of Bitcoin on Coinbase and Binance.

Sotiriou explained: “This indicator has been negative for several months during the market downtrend, showing that the Bitcoin value on Coinbase has been less than Binance. However, data from Crypto Quant shows that recently the Coinbase Premium Gap has spiked significantly. This could be a sign that US investors are buying Bitcoin more than the rest of the world, as Coinbase is mainly used by US investors.

“This could also infer that institutions are becoming more aggressive buyers, as Coinbase has a bigger institutional percentage of users compared to Binance.”

With mixed messages coming from the analysts, is Coinbase on the road to recovery, or is there more pain in store?

Road to redemption

“If the market recovers, so will Coinbase,” said Stefan Rust, CEO of blockchain developer Laguna Labs.

According to Rust, Coinbase’s core user base of enterprise and institutional investors, who remain “shellshocked” by the current market crash, has worked against the exchange.

Stakeholders should restrain from drawing too many contracts between Coinbase and Binance.

Comparing the two is also a bit like “chalk and cheese in the developing regulatory landscape of crypto,” according to Clem Chambers, CEO of Online Blockchain.

Following Coinbase’s April 2021 NASDAQ floatation, the company went long on US regulation, signalling its position that winning on the US regulatory front is the key to longevity.

With that bet has come what Chambers calls “major business-development drag”.

The figures speak for themselves: COIN shares have plummeted over 76% this year, while first-quarter earnings published on May 10 showed negative results in every conceivable way, from reduced trading volumes and active users to floundering net revenues and income losses of US$430mln.

While Coinbase remains preoccupied by the hawkish US regulatory system, Binance’s largest growth drivers are derivatives and non-US trading segments

“Outside of the US, the regulatory environment is much clearer, so Binance can focus more on product and client acquisition/retention,” observed Dave Weisberger, CEO and founder of CoinRoutes.

Rather than competitors like Binance, a more significant threat could be coming from the decentralised finance (DeFi) space, which has gained traction amid a string of high-profile bankruptcies among the centralised finance (CeFi) counterparts.

Unfortunately for Coinbase, as a publicly listed entity with thorough oversight from the Securities Exchange Commission (SEC), it could have limited exposure potential to this largely unregulated albeit lucrative DeFi segment.

But despite their differences, both Coinbase and Binance are at the mercy of the bigger picture; put simply, when the crypto market declines in value, so do the exchanges.

“The loss in (investor) confidence is real, and historically that takes time to overcome,” said Weisberger, adding: “Risk assets are likely to come under pressure again as we move into the fall. If that happens, Coinbase will be impacted, but if risk assets rally, crypto will also and Coinbase will benefit.”

Coinbase’s slush fund

Coinbase had over US$16bln in cash and cash equivalents in the first quarter of 2022, according to it earnings report.

While that initially sounds good, a breakdown of these cash flows shows that of this US$16bln, over US$10bln comprises “customer custodial funds”.

It makes sense that Coinbase adds their customers’ funds to the balance sheet in this way; recent history has shown us that entrusting your money with a centralised exchange is a bad idea.

But it could also bite Coinbase in the backside, since a substantial bank run could see these cash reserves deplete significantly.

On the bright side, that still leaves US$6bln in non-customer cash at hand, though the crypto winter has only deepened since May, so how much of this slush fund has been dipped into is anyone’s guess.

A clearer picture of Coinbase’s health will become clearer upon release of its hotly anticipated second-quarter results next month.

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