Coinbase’s $500+ Million Bid to Become the Backbone of the Crypto Industry

Coinbase’s 2021 has been no less exciting, what with its direct listing on the Nasdaq and its recent posting of earnings (before interest, taxes, depreciation and amortization) of $1.1 billion in the second quarter alone. Its prosperity can be taken as evidence that crypto as a whole is also prospering, and that the two are likely to grow in lockstep, with the wider market and Coinbase both mutually reinforcing each other.

Coinbase itself underlined this fact when it announced, on August 20, that it will buy $500 million in various cryptocurrencies and set aside 10% of its future profits for crypto.

If nothing else, this showed that the exchange is willing to become a kind of guarantor and guardian of the market, boosting demand (and prices) in order to entice investors to continue putting their own money into cryptocurrency. And at a time when the Coinbase-backed USDC stablecoin is becoming more important to market liquidity, it increasingly looks like crypto is coming to depend more on Coinbase with every passing week, for better and for worse.

Coinbase is Winning Now, But Bad Times May Lie Ahead

For the most part, Coinbase is doing very well. As its Q2 earnings report showed, it has been exceeding expectations, with its $2.23 billion revenues for Q2 comfortably passing the $1.85 billion estimated by analysts.

That said, as impressive as such performance is, it shouldn’t be assumed that Coinbase is in an unassailable position. In the same Q2 report it warned that “we believe retail MTUs [monthly transaction users] and total trading volume will be lower in Q3 as compared to Q2.” Seeing as how the market isn’t as strong as it was in Q2, this warning highlights just how quickly the position of even the biggest exchanges can change.

Indeed, it’s also worth noting that the wider market — that is, the stock market — isn’t entirely convinced by Coinbase, at least judging by its stock price. Having closed on its April 14 debut at a price of $328 per share, COIN has since flagged to $259 (as of writing), indicating a 21% fall. Its current level has improved from a low of $224 on July 18, but given that the cryptocurrency market appears to have begun a slide downwards (despite indicators of an incoming bull market), there’s every chance it could continue to struggle or stagnate.

Source: Yahoo! Finance

However, Coinbase appears to be more than aware that the performance of its own shares is intimately linked with the performance of the cryptocurrency market, as well as with confidence with mainstream (that is, stock) investors in the validity (or not) of crypto. This is why it announced it would be buying $500 million in cryptocurrency in the short term, while also committing to spend 10% of its quarterly profits on crypto.

Source: Twitter

Interestingly enough, the price of bitcoin jumped shortly after CEO Brian Armstrong made this announcement on August 20. It started the day at $46,600 before ending it at $48,600. It also climbed to $50,000 three days later, helped in part by momentum from the announcement.

Source: CoinGecko

Coinbase Is Taking on a More Active Role in Supporting Crypto

Almost needless to say, the bitcoin (and wider cryptocurrency) market has dropped more recently, back down to just under the $47,000 level. In other words, Coinbase’s public commitments to invest aggressively in crypto isn’t enough on its own to hold up the market, which continues to be volatile for a variety of reasons (e.g. prevalence of leverage and options, as well as alleged manipulation).

Nonetheless, Coinbase has been increasingly striving to buoy the market and cryptocurrency in recent months via another method: expanding the supply of the USDC stablecoin it backs in partnership with Circle.

The supply of USDC has expanded from $1.4 billion a year ago to just over $27 billion today, a 1,828% increase. As recently as March 1, 2021 its supply was only $9 billion, while it increased by roughly $7.8 billion in the month of May alone.

Certain critics had long suspected that USDC wasn’t sufficiently backed, implying that it may have been used (like some claim with USDT) to support (i.e. inflate) prices. Regardless of whether this was true or not, the injection of such liquidity into the market has, at the very least, almost certainly helped support market activity — and prices — indirectly.

In fact, Centre — the group overseeing USDC (and including Coinbase and Circle) — published a breakdown of its reserves this July, revealing that USDC is 61% backed by “cash & cash equivalents,” which may or may not include commercial paper. The rest of its backing included corporate debt and certificates of deposit with foreign banks, as well as US Treasuries.

Source: Circle

This attestation proved controversial, not only because Coinbase and Centre had long claimed that USDC was entirely backed by cash, but also because USDC’s backing was shown to comprise assets which pose a risk of default. As such, it may have been unable to honor conversions of USDC for USD in the event of a ‘bank run.’

However, in light of the backlash, Coinbase, Circle and Centre committed on August 23 to putting all of USDC’s reserves in cash and short-duration US Treasuries, thereby removing (in theory) any risk from a default.

Source: Twitter

This new policy will take effect from September, putting USDC on a surer footing, at least when compared to rival stablecoin USDT (which is backed by a large percentage of riskier commercial paper).

Tether is continuing to attract a considerable amount of skepticism and scrutiny, even with August’s publication of a new attestation that claims most of its commercial paper is rated A2 or higher. As such, Coinbase’s move to make USDC more secure has arguably come at the right time. By providing USDC with more dependable reserves, Coinbase and Circle can expand its supply — and boost market activity — without inviting excessive risks.

And in conjunction with its commitment to buy various cryptocurrencies, this suggests Coinbase may become (if it isn’t already) the biggest key to crypto’s future success. Sure, there’s no guarantee it will continue to grow or prosper as quickly as it has done in recent months. But with it endeavoring to reinvest a portion of its profits in the market it takes these same profits from, it’s taking the right steps towards setting up a stable symbiotic relationship.