Last Updated: 27 July 2022
Since April 2021, it has been possible to trade the US crypto exchange Coinbase shares on stock exchanges. Yesterday was a tough day for investors. COIN closed Tuesday 21% lower than the day’s starting price. What is going on?
Decrease of 21%
The stock started yesterday with a value of $61.74 but fell during the day to $52.93, a drop of 21%. COIN has fallen 75% compared to a year ago and is even 84% lower than its all-time high.
Bear market and 3 reasons
Coinbase’s stock price is a proxy for the health of the company, but, more importantly, for the sentiment surrounding the stock market. Let’s start with the crypto market. Bitcoin and all its little siblings have fallen incredibly hard since the end of 2021.
When crypto prices fall, there is less interest from the general public for crypto and, therefore, less trading. In itself, this is nothing special because this is part of a bear market, and every respectable crypto company on earth takes this into account.
But at Coinbase, there is more going on:
The Securities and Exchange Commission (SEC) has launched a new investigation against Coinbase.
Coinbase also hit the news badly because former employees are being charged with insider trading.
Coinbase laid off 18% of its staff in June.
1. New investigation SEC 9 cryptocurrencies
Bloomberg writes that the latest news actually predates the investigation into the indicted former employees (point 2), but it only emerged in the documents of the insider trading indictment.
In the indictment, you can read that the SEC is clashing with Coinbase over 9 tokens, including ENS, GALA, POWR, and ALCX. According to the financial watchdog, these tokens must fall under the securities legislation, which, of course, they enforce themselves.
Coinbase’s legal head, Paul Grewal, said the team is looking forward to the enforcement.
“We are confident that our rigorous due diligence process, a process that the SEC has already reviewed, will keep securities off our platform.” Coinbase previously asked the SEC to develop a framework for securities of digital assets.
By the way, the SEC is on an island — other government agencies such as the US Justice Department and the Commodities Futures Trading Commission (CFTC) have voiced criticism.
CFTC Commissioner Caroline D. Pham said the move to investigate 9 tokens named in the indictment as securities could potentially have “far-reaching implications for future legal disputes and consumers.”
To cope with the bear market, Coinbase has significantly expanded its offerings in recent months. They offer trading in over 150 cryptocurrencies/tokens. If the SEC succeeds in considering those 9 tokens as securities, the exchange would have to register with the regulatory watchdogs.
In that respect, you can consider the SEC’s investigation as an attack on Coinbase and not necessarily on those 9 tokens.
A step aside: in December 2020, the SEC sued crypto company Ripple because they believe XRP is a security. Many US exchanges chose to run away and removed XRP from trading, as otherwise, they would also have to fall under the SEC’s regulations.
2. Former employee trades with insider information
On 21 July, former Coinbase manager Ishan Wahi was arrested, along with his brother and a third person.
According to the Justice Department, this is the first case of insider trading in the crypto industry. The defendants used their privileged knowledge while working at Coinbase to sell information to others. In addition, they bought coins they knew would soon be listed on Coinbase.
This enabled them to benefit from the so-called Coinbase effect: every time a new coin is listed on the exchange, its price skyrockets. Therefore, coins that will be added to the range imust remain secret.
Wahi had access to private group discussions for high-ranking Coinbase employees. Through this, he received information about the exact date when some cryptocurrencies would be listed on the platform, allowing him to invest large amounts of money before other people could.
After a month of research, Coinbase tracked down Wahi, and they planned meeting on May 16, but the night before the meeting, Wahi bought a one-way flight to India. He could not get away because he was arrested at the airport. Before his arrest, Wahi sent several messages to his brother and business partner informing them of the investigation. They can get up to 20 years.
3. Mass redundancies at Coinbase
The image of a company is largely determined by how satisfied (past and future) employees are. In mid-June, CEO Brian Armstrong decided that there was too much deadwood at his company and that more staff was counterproductive for efficiency. As a result, 18% of the workforce was forced to look for another job.
Not only were staff laid off, but job offers were also withdrawn. Many had already quit their jobs to start at Coinbase, but they received a letter that this would not happen. This led to much consternation on social media.
“Adding new employees has made us less efficient, not more,” the CEO said. “We’ve seen ourselves slow down significantly due to coordination headwinds and difficulty fully integrating new team members.”