As FTX Collapses, Coinbase, MicroStrategy Bond Tank Reduce Institutional Confidence in Cryptocurrency

Bonds issued by cryptocurrency exchange Coinbase ( COIN ) and MicroStrategy ( MSTR ), a business intelligence firm and a bitcoin investor, fell as investors lost confidence in the industry following the collapse of FTX.

Coinbase’s bond due 2031 fell 15% to 50 US cents this month, yielding a record high of 13.5%, moving in the opposite direction to price, according to data source Finra-Morningstar. The decline comes after nearly three months of consolidation and marks an extension of the downtrend seen earlier this year. The yield on the company’s bonds due in 2026 rose to 17%.

Bonds related to business intelligence firm and bitcoin owner MicroStrategy took a similar hit. The yield on the company’s 2028 notes issued last year to fund its bitcoin (BTC) build-up rose to 13.35% on Friday as the price fell to a record 72.5 cents on the dollar. MicroStrategy holds about 130,000 BTC worth about $2.08 billion on its balance sheet.

The companies’ bonds carry a premium of about 1,000 basis points, or 10 percentage points, to the yield on 10-year U.S. Treasury notes as of Friday. In traditional markets, a premium of that level is taken to represent credit stress. The 10-year Treasury was yielding 3.80% at press time.

“Higher bond yields reflect sharply higher rates, but also real skepticism among institutional investors about the long-term viability of crypto after the high-profile collapses of Terra Luna, Celsius, 3AC, Voyager, BlockFi and FTX,” said Mike Alfred, value investor and founder of digital assets investment platform Eaglebrook Advisors, said.

Rich Rosenblum, co-founder of cryptocurrency trading firm and liquidity provider GSR, said the rise in bond yields represents increased credit risk.

“For Coinbase in particular, there’s an argument to be made that FTX is benefiting from strengthening its position in the US. So the story is getting better at the micro level, while the crypto credit environment has gotten worse,” Rosenblum told CoinDesk.

Coinbase’s debt yields hit record highs after FTX’s bankruptcy.

FTX, the digital asset exchange founded by Sam Bankman-Fried, filed for bankruptcy on Nov. 11, sparking concerns of a market-wide contagion. Prominent venture capital firm Multicoin, one of the many companies exposed to FTX, told investors that its net performance was down 55% this month, and according to CNBC, the collapse of FTX will wipe out many firms in the coming weeks.

“These bond yields were actually the first sign of weakness in the space. It was a canary in the coal mine, even a sign of stress in the crypto space before all the explosions this year,” said Darius Sit, founder and chief investment officer at crypto options trading firm QCP Capital. Sit said his firm would watch earnings as a “possible leading sign of recovery.”

While Coinbase may be insulated from the direct impact of the FTX crash, its vulnerability to other negative impacts, such as reduced trading levels, could make investing in Coinbase bonds or shares unattractive. This is certainly what many in the investor community are thinking.

Last week, Goldman Sachs maintained a sell rating on Coinbase shares and lowered its 12-month price target to $41 from $49, saying once volatility caused by FTX has decreased, lower cryptocurrency prices and the potential for lower investor confidence will have an impact. trading volumes. Shares of Coinbase fell 31% this month to close at $45.26 on Friday.

“If you have equity in Coinbase, assess your counterparty risk now,” said Lawrence MacDonald, author of the popular Bear Traps report. he tweeted After noting a jump in bond yields and a drop in stock prices on Sunday.

Some investors believe that bonds linked to Coinbase and MicroStrategy are a safer way to bet on the cryptocurrency’s revival. While this is true, bonds are likely to underperform spot bitcoin.

“Bonds are a safer route because there is usually some recovery even in a bankruptcy. But the upside is also weaker,” GSR’s Rosenblum noted.

UPDATE (November 21, 9:54 UTC): FTX crash, investor comments, Goldman Sachs Coinbase attached to chart below.

UPDATE (November 21, 12:14 UTC): Adds comments from GSR’s Rich Rosenblum in paragraph 7 and at the end.

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