Seemingly compounding pain, popular cryptocurrency exchange and wallet service Coinbase (NASDAQ:COIN) struggled mightily over the past several trading sessions on bankruptcy concerns. The sentiment isn’t unfounded, based on rival platform FTX and its Chapter 11 bankruptcy. In the trailing five sessions prior to the Wednesday open, COIN stock dropped 18% in equity value.
Fundamentally, Coinbase suffers from a two-pronged headwind. After soaring to a record revenue tally of $7.84 billion in 2021, the company encountered a radical paradigm shift this year. With the total market capitalization of all cryptos plunging approximately 62% on a year-to-date basis, Coinbase users saw little reason to expose their capital to such horrendous erosions.
Strikingly, the company posted revenue of $590 million in the third quarter, down 55% against the year-ago period. As well, Coinbase posted a net loss of $545 million, a picture of extreme contrasts against net income of $406 million in Q3 2021.
The second and more worrying headwind centers on what Bank of America called a “contagion risk” from the FTX bankruptcy. Although COIN stock may represent a different matter, BofA’s Jason Kupferberg stated, “[t]hat does not make them immune from the broader fallout within the crypto ecosystem.”
To be fair, management declared several days ago that it’s not about to run out of cash. Therefore, a Coinbase bankruptcy might not materialize. As well, Wall Street legend Cathie Wood went on a buying spree of COIN stock, encouraging embattled optimists.
Lingering Fears Still Cloud COIN Stock
While Coinbase may be doing everything right, it’s the binary emotions involved in the crypto space that has investors on edge regarding COIN stock. When it comes to crypto failures, protections may not exist.
According to Investopedia, “[i]f a bank fails, the FDIC insures deposits. Investors should know that if their crypto exchange goes out of business, no government agency will make them whole.” Given the implosions of other blockchain-based enterprises, investors are likely in no mood to take chances. Therefore, folks should not be dismissive of a possible Coinbase bankruptcy.
Plus, with cryptos stuck in a severely bearish cycle, little incentive exists for investors to hold funds in risky virtual currencies. Thus, COIN stock could incur losses for circumstances out of its control.
Another factor that’s surely running in the minds of investors is that earlier this year, Coinbase’s CFO warned about a small risk of bankruptcy. Pundits readily noted the obvious: Financially robust companies don’t make such statements.
Lastly, Coinbase does feature an Altman Z-Score of 0.14, according to GuruFocus. Ominously, this level indicates a distressed business, meaning that there is a higher-than-normal risk of bankruptcy over the next two years. While it’s no guarantee, this fact alone probably won’t soothe the nerves of those with a heavy allocation in COIN stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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