Does Cathie Wood Give Up Co

Famous growth stock investor

Catherine Bois (Trades, Portfolio) was just buying shares of Coinbase Global Inc. (PIECE OF MONEY, Financial) for Ark Invest in the second quarter. Even though the stock fell amid the crypto winter, Wood remained firm on the long-term outlook for crypto in general and Coinbase in particular.

However, even the most optimistic investor can get cold feet when allegations of insider trading come into play. On July 21, US authorities charged three people with engaging in insider trading using crypto. . Among them was a former product manager at Coinbase.

A few days later, on July 26, Ark’s daily trading information showed that the company had sold Coinbase shares of three of its exchange-traded funds to the tune of more than 1.4 million.

Is Wood Finally Ditching Coinbase and Should Investors Follow His Lead? Has the stock simply become too risky amid declining interest in crypto and the introduction of regulatory scrutiny?

Insider Trading Allegations

On July 21, the U.S. Attorney’s Office for the Southern District of New York, in conjunction with the Federal Bureau of Investigation’s New York Field Office, said it had filed an indictment against a former chief product officer. Coinbase with his brother and another associate. .

Apparently, the three used confidential information obtained from Coinbase to earn around $1.5 million by trading various cryptocurrencies. According to authorities, the former product manager was in a position to know inside information about when Coinbase would list cryptocurrencies on its exchanges, and he passed this information on to his brother or associate so they could invest in coins ahead of an anticipated price rise. .

“While the allegations in this case relate to transactions made on a crypto exchange — rather than a more traditional financial market — they still constitute insider trading,” FBI Deputy Director Michael Driscoll said.

The SEC also filed parallel charges against the three, saying it would seek “a permanent injunction, reimbursement with prejudgment interest, and civil penalties.”

This is big news, and not just because it’s an insider trading scandal; This is the first-ever charge against those accused of a crypto-related insider trading scheme.

Regulatory review has just begun

Shares of Coinbase closed at $52.90 on Tuesday, down 21% as Ark ETFs sold shares, although they rallied to $62.40 on Thursday. Year-to-date, the stock is down 75% on a combination of slowing earnings on falling crypto trading volumes and concerns that regulatory attention will shift to the space. crypto.

This is arguably just the start of increased regulatory scrutiny over crypto, which critics have long decried as a haven for criminals and a breeding ground for money laundering schemes.

It’s not just insider trading and payouts to cybercriminals that are finally pushing regulators into a decision-making mindset. According to a recent white paper from the New World Economic Forum, regulators continuing to sit on the sidelines is the least effective approach to monetary and financial stability. For more innovation and integration to truly progress with digital currencies, they must be allowed to play a regulated role in the economy rather than an unregulated role.

So how would introducing regulation to the crypto industry work for Coinbase? We do not yet know the answer to this question, which partly explains the wariness of investors. However, one potential outcome emerged on Tuesday, the same day Ark sold some of its shares: the SEC questioned whether certain crypto tokens are in fact securities.

Now Coinbase is under investigation over whether it improperly allowed Americans to trade digital assets that should have been registered as securities, unnamed sources told Bloomberg.

Coinbase naturally disputed this classification. “We disagree 100% with the SEC’s assertion that all crypto assets we list are securities,” said Paul Grewal, chief legal officer of Coinbase.

Last Thursday, the company also filed a petition asking that the SEC “start making rules for digital asset securities.” The longer regulators take to introduce proper definitions and rules to the crypto market, the greater the risk for companies like Coinbase who are somehow unaware if their currently legal business operations can suddenly be considered illegal. from the beginning.

The Crypto Winter Won’t Last Forever

With regulatory issues finally in the spotlight and with crypto trading volumes, Coinbase’s primary source of revenue, in decline, it might seem like all cards are stacked against the crypto exchange company.

However, the crypto winter will not last forever. Many still believe that crypto will play a key role in transforming the financial sector and the global economy. In a sense, decentralized digital currencies are the ultimate form of capitalism, with the potential to increase economic freedom and accelerate global innovation. Cities, nations, businesses, and individuals around the world continue to invest in building crypto infrastructure.

The crypto space is now beginning to undergo the painful but necessary process of the law deciding exactly where it stands on the matter. What the law decides will not necessarily mean the death of all crypto companies. It is possible that some of these decisions will make some crypto companies obsolete or force them to review their operations in order to come into compliance.

However, this in itself does not mean that the crypto will simply disappear. Some tokens might become obsolete and some companies might go bankrupt or end up being dissolved due to failure to comply with future laws, but the concepts and major cryptocurrencies will likely be fine.

Coinbase is confident in its risk management

Although Coinbase’s regulatory future is uncertain, its business is unlikely to become illegal unless the crypto itself becomes illegal. So while he may continue to take short-term hits, the question of his long-term survival comes down to how he will avoid bankruptcy amid falling revenues and the potential for regulatory fines.

With a debt-to-equity ratio of 1.73 and an interest coverage ratio of 69.31, Coinbase appears to maintain a much healthier balance sheet than many other companies involved in fintech. Analysts don’t expect it to turn profitable until at least 2024, which is worrying.

Over the past month, Coinbase has combined its USD and USDC marketplaces, shut down Coinbase Pro, shut down its affiliate marketing program, and laid off 18% of its workforce. All these signs indicate that a liquidity crisis could be brewing.

Despite the reduction in operations, Coinbase remains confident in its risk management measures. Three of Coinbase’s department heads say Three Arrows Capital, Celsius and Voyager’s solvency issues were due to ‘risky lending practices’ and ‘insufficient risk controls’ rather than problems with the crypto it -same. They further stated:

“The issues here were predictable and actually specific to credit, not crypto in nature. Many of these companies were over-leveraged with short-term liabilities incompatible with longer-duration illiquid assets. We believe that these market participants have been caught up in the frenzy of a crypto bull market and have forgotten the basics of risk management.

Carry

With all the risks Coinbase faces, it wouldn’t be surprising if even Wood decides to sell more of his company’s substantial stake in the company, which was 4.03% of Coinbase’s outstanding shares at the end. of the June quarter. The combination of a crypto crash and two SEC investigations, one of which could potentially consider cryptocurrencies as securities, could very well prove deadly.

Crypto is unlikely to disappear completely. In fact, given the enthusiasm with which crypto infrastructure is being built by many cities, states, and countries, its influence will likely continue to grow in the long run. The fate of the industry is not that of an individual company, however, and Coinbase’s risks are piling up.

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