S&P Global downgrades Coinbase credit rating for weak Q2 earnings, competitive pressures

S&P Global downgrades Coinbase credit rating for weak Q2 earnings, competitive pressures

After its most recent earnings report, Coinbase, a major American cryptocurrency exchange, was downgraded by S&P Global from BB+ status to BB status.

In a note dated Aug. 11, the agency confirmed that it had downgraded Coinbase. This was due to Coinbase’s poor performance in the second quarter 2022. Coinbase’s loss of market share to its competitors in this year’s cryptocurrency exchange sector highlighted the increased competitive risk.

“The negative outlook is due to uncertainties about the length of the crypto market decline and the company’s ability operate efficiently by prudently managing operating expenses.”

The rating agency also noted the possibility of ‘further share deterioration’ due to regulatory risk and the competitive landscape. The agency pointed out that Coinbase’s total trading volume fell 30% quarter-on-quarter, but that the total volume of cryptocurrency spot trading across all venues decreased only 3%. This resulted in a smaller market share.

It was acknowledged that spot trading is more concentrated among market-makers, high-frequency traders firms, and Coinbase has a much smaller market share.

S&P Global highlighted that the cryptocurrency bear market continues, with total assets on Coinbase falling 63% to $96 Billion from the first quarter. This was due to weakened cryptocurrency prices and net outflows by institutional clients.

Coinbase reports a $1.1B loss for Q2 due to the ‘fast and furious ‘crypto downturn

The rating agency also believes that Binance’s decision to eliminate its Bitcoin trading fees all over the globe led to Coinbase being forced to review its fee structures, which remain a significant revenue source for them.

“We believe that Coinbase’s trading fees are higher than those of peers. This is combined with aggressive pricing actions taken by competitors. This could increase the chance of fee compression in its retail channel, which generated around 80% of the company’s total revenues in half of 2002.

There are regulatory pressures as well. Coinbase is currently under investigation for its staking programs, and the classification of various crypto tokens. In July 2022, the U.S. SEC also indicted a former Coinbase employee with securities fraud. This further puts the exchange under scrutiny.

S&P Global believes that Coinbase will continue to be a low-risk company despite the downgrade. This is despite the fact that macro factors have been exacerbated by the recent cryptocurrency market decline.

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