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Coinbase has Been Betting on a Crypto Collapse, Quarterly Reports Suggest

Published August 18, 2023 11:57 AM
Teuta Franjkovic
Published August 18, 2023 11:57 AM
Key Takeaways
  • Coinbase’s quarterly earnings indicate it may have been shorting cryptos using financial derivatives tactics
  • Coinbase acquired a license as a registered Futures Commission Merchant
  • That could enable the exchange to “front run” investors as they are already utilizing it to boost corporate revenue
  • As the benchmark U.S. Treasury yield increased to its highest level in almost two years, the cryptocurrency market crashed

After the bell on Thursday afternoon, August 18, Coinbase released  its second-quarter profits, with its reports exceeding market expectations.

The total income for the second-largest cryptocurrency exchange by trading volume in Q2 was $707.9 million, down from $772.5 in the previous quarter and $808.3 million in the same period last year. Additionally, it reported a net loss of $97 million and a positive adjusted EBITDA of $194 million for the quarter.

But other than the good figures, there was an indication that the company may have been betting on a crypto collapse — which has since materialized with Bitcoin shedding a few thousand dollars over night.

Was Coinbase Shorting Cryptocurrencies?

Interestingly, quarterly public reports  that the company disclosed to the SEC and investors indicate that Coinbase has been shorting cryptocurrencies using financial derivatives tactics. A short position typically favors lower prices and is taken against the market.

Short positions can be opened in one of two ways: (A) using futures contracts with executable orders that profit when the price drops below what is trading on the spot market; or (B) borrowing cryptocurrencies using other assets as collateral, with the expectation that they will later buy the assets back at a lower price, to repay the loan and profit with the difference, receiving the collateral back.

Coinbase has been in contact with CCN and we await its reply

Allocation of Short Positions

According to the 2023 Q2 report , Coinbase had a total of $300.15 million in potential short positions as of December 31, 2022. These positions were split as follows:

  • $136.23 million (as a hedge) in shorting positions with futures contracts
  • $12.46 million (not as a hedge) in shorting positions with futures contracts
  • $81 million (as a hedge) in “crypto assets borrowings with embedded derivatives”
  • $70.46 million (not as a hedge) in “crypto assets borrowings with embedded derivatives”

Coinbase has a total of $119.66 million in potential short positions as of June 30, 2023, allocated as follows:

  •     Using futures contracts to short positions totaling $187,000 (not as a hedge)
  •     In “crypto assets borrowings with embedded derivatives,” $119.48 million was borrowed (as a hedge)

The corporation had $13.10 million on December 31, 2022, and $23.08 million on June 30, 2023, according to the deposited collaterals.

Coinbase quarterly report
Credit: Coinbase Investor Relations

Crypto Futures on Coinbase

On August 16, the following was posted by the Rho Rider account on Twitter (X):

Coinbase’s Revenue Boosted by Futures Contracts

In response to the recent revelation  that Coinbase would market cryptocurrency futures, there was a warning that they may use this technology to “front run” investors as they are already utilizing it to boost corporate revenue in addition to being a provider of futures contracts.

Finally, information from previous quarterly filings suggests that Coinbase has had much larger short positions on both futures contracts and borrowed assets. For instance, on December 31, 2021, just after Bitcoin (BTC) hit its all-time high of $69,000 in November, Coinbase had nearly $660 million in borrowed assets.

The license to trade futures contracts was granted to Coinbase by the National Futures Association, a CFTC-designated SRO.

The company said it believes regulation and transparency are vital and foster trust among institutions and individual clients.

“Access to a CFTC-regulated crypto derivatives market is essential to unlocking significant growth and enabling broader participation in the cryptoeconomy,” the company stated.

The business submitted an application to the NFA for a license in 2021 to register an FCM.

Since then, the company has worked with regulators to ensure it will comply with all necessary regulations and that its FCM’s business model meets the CFTC’s customer protection requirements.

Maybe the most interesting part comes where Coinbase explains why getting the license is a significant turning point for the business and indirectly confirms its shortening actions:

“The global crypto derivatives market represents ~75% of crypto trading volume worldwide and is a critical trader access point.”

“Being able to express long and short positions, investors also use derivatives to manage risk on their underlying crypto assets.”

Did Coinbase Bet on Crypto Going South?

The crypto market crashed substantially a day after its quarterly report went out. However, there are plenty of other things to blame here, such as rising U.S. bond yields. Specifically, yesterday’s crypto market went south as the benchmark U.S. Treasury yield rose  to its highest level in nearly two years.

According to CoinGecko , the current market cap of all cryptocurrencies is $1.1 Trillion, a change of -6.1% over the past 24 hours and -0.7% over the past year. Bitcoin’s (BTC) market cap  currently stands at $514.3 billion, representing a 47% market share.

Since mid-July, the crypto market has been in a decline, coinciding with gains in the U.S. dollar index (DXY) during the same period.

In addition, its decline coincides with the growth of U.S. bond yields. The yield on the benchmark 10-year U.S. Treasury note rose to 4.31%  on August 17, the highest level since October 2022. This suggests that investors prefer yield-free cryptos like Bitcoin to secure assets.

The yields increased the day after the minutes from the Federal Open Market Committee’s (FOMC) July meeting reiterated hawkishness . Notably, the majority of Fed officials believe that inflation could remain elevated without further interest rate increases, increasing expectations for a September rate hike.

Historically, expectations of higher interest rates have been adverse for the cryptocurrency market, which likely explains the market’s decline on August 17.

According to the data below, however, the implied Fed funds futures rates forecast the first rate decreases to occur around May-June 2024. The Fed rates are anticipated to remain within the current range of 5.25-5.50 percent until then.

Notably, investor Kevin O’Leary  has observed a decline in lending and an increase in small business financing costs. Additionally, he has highlighted emerging vulnerabilities in regional institutions.

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