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Coinbase: keep it crypto

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Cryptocurrency exchange Coinbase’s $1.25bn foray into the convertible bond market this week may be a sign of cryptos going mainstream. But the sight of such a borrower raising vanilla equity capital was not necessarily something to cheer about.

Coinbase's deal this week was eye catching for a number of reasons and not just because of its size, or the fact that the company only went public in April. Bitcoin, along with many other cryptocurrencies, fell more than 30% in trading on Wednesday after Chinese regulators signalled their intention to crack down on digital currencies.

At the same time, Coinbase also suffered an outage on its platform that left many of its users unable to trade during the spike in volatility. This led to the convertible bonds trading down in the aftermarket, before staging a rebound on Thursday as the price of bitcoin recovered along with Coinbase’s share price.

Cryptocurrencies lie beyond the scope of regulated financial markets, for now, which makes Coinbase's $1.25bn deal something of a paradox. The company used conventional, clean shaven, short back and sides equity markets to finance a business altogether more freaky and hairy.

Cryptos' legions of fans are unlikely to be put off by this week's volatility but investors in public equity markets have just had a short, sharp shock about their growing influence.

Despite the conventional funding, Coinbase's underlying business carries huge ESG and regulatory risks. Mining bitcoin, the method used to verify transactions, uses as much electricity as a mid-sized European country. The lack of regulation in the sector makes it ripe for scams. Meanwhile, appetite is so frothy that the market can rise and fall on the whims of Elon Musk.

Valuing a company is hard enough, let alone its convertible bonds. When the underlying business is as volatile as Coinbase's, one can only hope convertible investors riding cryptos to the moon don't crash land.

 

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