Moody’s said Coinbase could pursue further downgrades if it doesn’t diversify from its current revenue model or if it is unable to make a profit in the long-term bear market. The credit rating agency Moody’s downgraded Corporate Family Rating (CFR) and guaranteed senior unsecured notes on the crypto exchange Coinbase, saying both ratings were under review for further downgrades.
The CFR, a rating set to reflect Moody’s views on a company’s ability to respect financial obligations, has been downgraded from Ba2 to Ba3, which is considered below the non-investment grade.
Senior unsecured notes are a type of debt a company holds that is not supported by any assets and in the event of bankruptcy must be repaid in case of bankruptcy. Moody’s has downgraded Coinbase from Ba1 to Ba2.
Cointelegraph reported Coinbase’s junk bonds tanked in response to an underwhelming first quarter and since the report, the bonds have continued to fall a further 9.5% earlier in May.
In is fundamental for the downgrades, Moody’s emphasized Coinbase’s revenue model “is tied to trading volumes, transaction activity per user and overall crypto asset prices.” It said the sheer price decline in crypto over the past months has caused customer trading activity to wane, which in turn caused weaker revenue and cash flow for the company.
The ambiguous situation forced Coinbase to lay off on June 14. But even with this measure, Moody’s said it supposes Coinbase’s success to “remain challenged in the current environment”.
The competition for customers has also been heating up in the United States after Binance.US began offering zero-fees spot trading for Bitcoin (BTC). The offer follows in the footsteps of trading platform Robinhood which pioneered no-commission crypto-trading in 2018.
On June 23 Coinbase added five new Ethereum (ETH) ERC-20 tokens plus the ability for users to send and receive some assets on the Polygon (MATIC) network along with USD Coin (USDC) on Solana (SOL) in a bid to attract users to the platform,
Moody’s said it could call out for more downgrades should crypto prices continue to fall and if trading volumes on the exchange remain the same or fall further. It will also look at whether the firm can decrease expenditures, and its ability to maintain talent as well as potential “crypto-asset regulatory developments.”
The rating agency added that Coinbase’s ratings could be promoted again in the future if it can generate a profit even during a bear market and expands its revenue through other streams not associated with trading and cryptocurrency prices, observing that crypto transaction-based revenue represented 87% of Coinbase’s net revenue in Q1 2022.
Coinbase’s shares were up 13.4% to close at $58.88 on Thursday but fell just over 1% in after-hours trading. Its shares are down nearly 77%.
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