Bonds issued by cryptocurrency exchange Coinbase (COIN) and MicroStrategy (MSTR), an economic intelligence firm and Bitcoin investor, fell as investor confidence in the industry plummeted after the collapse from FTX.

Coinbase’s 2031 bond is down 15% this month at 50 cents on the dollar, according to data source Finra-Morningstar, pushing the yield — which moves in the opposite direction of the price — to an all-time high. of 13.5% Has. The drop comes after nearly three months of consolidation and marks a continuation of the downtrend seen earlier this year. The yield on the company’s 2026 bond rose to 17%.

Bonds linked to MicroStrategy, an economic intelligence firm and holder of Bitcoin, suffered a similar blow. On Friday, the yield on the company’s 2028 notes, issued last year to fund Bitcoin (BTC) accumulation, jumped to 13.35% as the price fell to a record 72.5 cents on the dollar. . MicroStrategy holds around 130,000 BTC on its balance sheet, worth around $2.08 billion.

Corporate debt has a premium of about 1,000 basis points, or more, than the yield on 10-year U.S. Treasuries on Friday. In traditional markets, a premium of this magnitude is assumed to represent credit stress. The 10-year government bond yielded 3.80% at press time. One percentage point equals 100 basis points.

“High bond yields reflect markedly higher interest rates, but also genuine skepticism about the long-term viability of cryptocurrencies among institutional investors following the high-profile crashes of Terra Luna, Celsius, 3AC, Voyager, BlockFi and FTX” Mike Alfred, a value investor and founder of digital asset investment platform Eaglebrook Advisors, said.

The Implosion of FTX Is Not Good News for Coinbase

Coinbase isn’t directly exposed, but the scandal further erodes trust in cryptocurrencies.

Less competition seems to be a good thing for cryptocurrency exchange Coinbase (COIN -7.23%). A major competitor disappearing virtually overnight would be a boon to almost any industry. Imagine if Pepsi just packaged it. Or if FedEx had decided packages just weren’t their thing.

The cryptocurrency industry, if you can even call it an industry, is not like that. Coinbase makes most of its money by charging fees when its customers trade. For clients to trade, they must believe that they can make a profit. And for clients to believe they can make a profit, they need to have at least some confidence in the crypto economy.

The collapse of FTX, which turned out to be a toxic stew of fraud and shoddy accounting, is the latest blow to the collective trust of crypto speculators. It remains unclear how many billions of dollars in client funds are missing or if those funds will ever be recovered. Worse still, other crypto companies that held assets with FTX are now facing their own crises. For example, cryptocurrency lender BlockFi is reportedly preparing for its own bankruptcy filing, according to The Wall Street Journal.

The king of nothing

Coinbase does not appear to have direct exposure to FTX in any significant way. The company said it has little exposure to FTX and no exposure to the FTT token, which has plummeted in value. However, the real problem is not the direct exposure.

Cryptocurrency was a huge hit during the first two years of the pandemic. Not only has the price of Bitcoin increased, but so has the price of countless other tokens. The non-fungible tokens linked to the images have raised millions of dollars each. Companies have appeared promising too-good-to-be-true rewards for depositing cryptocurrency. It all worked out as cryptocurrency prices continued to rise.

As cryptocurrency prices began to decline earlier this year, the fragility of the crypto economy began to show. Businesses began to go bankrupt. Crypto lender Celsius filed for bankruptcy in July after freezing customer assets; the $60 billion Terra Network exploded when its crypto-backed stablecoin crashed; and cryptocurrency hedge fund 3AC fell apart after once managing $10 billion in assets.

Each failure individually is not particularly problematic for encryption as a whole. What is problematic is when these failures cause a cascade. The counterparties of failed companies face their own crises, then the counterparties of those companies come under pressure, and so on. Those who own and trade cryptocurrencies have no idea who to trust. A bull case for Coinbase is that the company could appear to be the last man standing. Supposedly, he’s not doing anything shady with his clients’ deposits and has about $5 billion in cash to weather the current storm. As other cryptocurrency exchanges collapse around it, Coinbase can serve as a beacon of stability.

The problem with this argument is the assumption that this storm will not spell the end of the cryptocurrency industry as we know it. Bitcoin will still be there, but right now the trust has been broken. The era of easy profits trading meaningless digital currencies is probably over. And when he does, Coinbase will sit on his throne as the king of nothing.

Coinbase could fail, too

Coinbase faces no immediate risk of default, provided its financial statements are accurate and there is no undue risk that anything is about to go down. But all of its business depends on retail investors being willing to pay a premium to buy and sell cryptocurrencies. All other revenue from the services is also ultimately dependent on continued interest in cryptocurrency trading.

Coinbase has approached institutional investors, but generates very little revenue from these transactions. And institutions burned by a relentless stream of scandals might start to think twice about getting involved in the cryptocurrency markets.

Despite Coinbase’s large balance sheet, the bond market is crying out that something is wrong. Notes issued by Coinbase in late 2021 and maturing in 2028 are currently on sale for 56 cents. Rising interest rates explain part of this slump, but not all. Bond investors clearly don’t like what they see.

Coinbase has made progress on cost reductions, but is still burning through its cash as revenues plummet. Cash and cash equivalents decreased by $2.1 billion in the first nine months of this year. Even if Coinbase survives this “crypto winter”, the idea that interest in cryptocurrencies will rise again as it has in the past requires a leap of faith.

My guess: Bitcoin will remain as a novelty, but certainly not as “digital gold” and everything else will disappear. This is not an environment in which Coinbase can thrive.