The rating agency said that Coinbase’s trading volume, which is one of its main sources of revenue, has been declining as cryptocurrency prices have been falling over the past months.
Moody’s downgraded Coinbase due to the bear market. It warned that it might not be the last time.
Moody’s said further cuts could follow if Coinbase doesn’t diversify from its current business model or it’s unable to turn a profit even in an extended bear market.
Moody’s has downgraded Coinbase’s credit rating from A3 to Baa1, and its senior unsecured notes from BBB+ to Ba2.
The CFR, a credit rating assigned by Moody’s Investors Service reflecting the firm’s opinion of a company’s ability to pay back debt, was downgraded from Baa2 to Baa3, which is considered “below investment grade.”
A senior secured note is a type of debt a corporation holds that is backed by assets. If the company goes bankrupt, the holders of the senior secured notes will get paid first. A junior secured note is a type of debt a company holds that may be backed by assets. If a company goes bankrupt, the junior secured notes will get paid before the senior secured notes.
Back in May, Cointelgates reported that Coinbase’s junk bonds tanked in response to an underwhelming first quarter, and since then, the bonds have continued falling another 9.5%.
According to Moody, Coinbase’s revenue model is “tied to trading volumes, transaction volume per user, and overall cryptocurrency prices.” As the price of cryptocurrencies has declined sharply over the past few months, so too has the number of transactions made by Coinbase’s customers. This has led to lower revenues and cash flows for the company.
Coinbase laid off about 18 percent of its workforce on June 14th. Even with this measure, Moody’s said it expected Coinbase’s profitability to remain challenged in the current environment, due to competition from other exchanges like Binance. The US. Competition for customers has also heated up in the U.S., following the launch of Binance.US, which offers zero-fee spot trading for Bitcoin (BTC). The offer follows in the steps of Robinhood, which pioneered zero-fee crypto-trading in early 2018.
To attract users to the platform and to allow them to send and receive some cryptocurrencies on the Polygons network, Coinbase added five new Ethereum (ETH) tokens plus the ability to send and receive some USD Coin (USDC) on the Solana blockchain.
Moodys said it could downgrade Coinbase’s rating again if it cannot generate profits even during a bear market, and if trading volumes on its exchange remain the same or drop further. It will also consider whether the company can reduce costs, and its ability to retain talent as well as potential “crypto asset regulatory developments.” The rating agency added that the firm’s ratings could be upgraded once more if it can generate profits even during a bull market and diversify its revenue through other streams unrelated to trading and cryptocurrency prices, highlighting that crypto transaction-based revenues represented 87% of Coinbase’s net revenue in Q1 2020.
Coinbase’s shares were up 13.5% to close at $59.00 on Thursday but fell just under 2% in after-hours trade. Year to date, Coinbase’s shares are down nearly 78%.
