coinbase crypto exchange

The US-based pure-play crypto exchange Coinbase just shared a blog post in which it cleared the air in regards to its risk management practices concerning its lending services in an attempt to maintain the public’s confidence at a point when several firms within the industry are either collapsing or showing signs of significant financial distress.

First and foremost, Coinbase clarified that it has no exposure to the failed entities that have the headlines lately including Celsius Network, Voyager Digital, and Three Arrows Capital – all of which have filed for bankruptcy and have left their customers with little to no recourse to recoup their money.

In the case of the first two companies, which were direct rivals of Coinbase, their reckless lending practices and poor risk management protocols led to their collapse as the crypto winter pushed the value of the collateral their customers pledge to the point that they were unable to recover most of the money they lent after liquidating those assets.

“We have not engaged in these types of risky lending practices and instead have focused on building our financing business with prudence and deliberate focus on the client”, Coinbase stated.

Coinbase Shares Its Risk Management Principles

Coinbase also shared some of the practices that have allowed it to survive similar scenarios in the past including its commitment to hold customers’ assets 1:1, which appears to mean that they don’t act like a bank in the sense that they lend money from other customers to institutional clients.

To achieve this, Coinbase (COIN) requires collateral that surpasses 100% to issue a loan meaning that they use the same money the client has deposited instead of resorting to money from other parties or even to its liquid reserves.

As to how the firm protects itself from an event such as the crypto winter, which can lead to rapid declines in the loan-to-value ratio of their portfolio of credit instruments, Coinbase stated that they have adopted four risk management practices to protect their balance sheet in these scenarios.

  • They conduct thorough due diligence on the businesses they lend money to.
  • They periodically conduct stress tests on their loan portfolio by running Monte Carlo simulations – which is a way to understand how the value of both assets and liabilities would react in different scenarios.
  • They gain a deep understanding of how every business they work with works and how bad things could go by finding their potential points of failure.
  • They anticipate and have buffers in place in case both internal (customer facing) and external shocks (macro variables) occur.

By relying on these principles, Coinbase has managed to stay alive during the latest turmoil in the crypto market. That said, the company has still taken a hit in terms of its financial performance during the period as the value of the assets they deal with has declined significantly.

Coinbase’s Next Earnings Report Will Reveal the Full Extent of the Damage

During the first quarter of its 2022 fiscal year, Coinbase’s trading volumes experienced an 8% decline on a year-on-year basis while they experienced a 44% drop compared to the previous quarter.

Retail volumes were the most affected amid the crypto winter as Coinbase reported a 38% drop in this metric compared to Q1 2021 and a 58% decline on a sequential basis.

In addition, total assets on platform dropped by $22 billion to end the quarter at $256 billion. However, this report was issued before the collapse of the Terra ecosystem and prior to the bankruptcy of the companies mentioned earlier in the article.

Coinbase is scheduled to report its Q2 2022 earnings on 2 August and this release may show the extent of the damage that the crypto winter and these developments have caused to the company’s asset base, trading volumes, and other important operating metrics.

Other Related Articles:

Battle Infinity - Latest Metaverse Game

Our Rating

Battle Infinity
  • Presale Sold Out Early - battleinfinity.io
  • Upcoming Listing on PancakeSwap
  • Fantasy Sports Themed Games
  • Play to Earn Utility - IBAT Token
  • Powered By Unreal Engine
  • Solid Proof Audited, CoinSniper Verified
Battle Infinity