Will Coinbase go bankrupt? US company warns 98m customers they could lose all their crypto as shares plunge

Cryptocurrency markets are currently facing a downturn after some of the world’s biggest digital currencies, including Bitcoin and Terra Luna, plummeted in price.

It has come amid reports of a loss of confidence in the markets, with crypto investors said to have been spooked by the global economic pressures brought on by the Russia-Ukraine war and post-Covid lockdowns.

There have also been major price shocks due to Elon Musk’s recent sudden decision to stop people from using Bitcoin to pay for Tesla cars, as well as China’s crackdown on crypto.

Anxiety has only grown after key crypto exchange Coinbase issued a warning about the implications of a bankruptcy in its first-quarter (Q1) earnings report.

So what has Coinbase said - and why did it spook investors?

Here’s what you need to know.

What is Coinbase?

Founded in 2012 by current CEO Brian Armstrong and Fred Ehrsam, Coinbase is a crypto exchange platform

It gives people the chance to buy, store and sell most of the major cryptocurrencies, and provides real-time information on their values.

The platform also allows people to trade non-fungible tokens (NFTs) and runs a debit card for crypto users.

According to its website, the firm has more than 98 million verified users in more than 100 countries, who trade around $310 billion of cryptocurrency every quarter.

What did Coinbase say about bankruptcy?

Coinbase has added fuel to anxieties among crypto investors this week after posting significant losses and talking about bankruptcy.

Shares in the platform halved in value this week, according to the AP news agency, after Coinbase posted a net loss of $430 million (£350 million) in its Q1 results.

This loss had come as a result of a fall in revenue generated by fees on crypto trades, as well as a decline in users totalling almost a fifth (19%).

As of Wednesday (11 May), its share price was $53.72.

When it went public 13 months ago, prices sat at $429 per share.

In a letter to its shareholders, Coinbase said it did not expect its losses to be part of a long-term trend.

Further concern was generated by a statement in its Q1 earnings report which warned customers about what would happen in the event Coinbase goes bankrupt.

It read: “The crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.”

In this eventuality, the exchange said its users might lose all the cryptocurrency stored in their accounts as they would become “general unsecured creditors”.

This means they would find themselves down the pecking order of people owed money by the firm should it find itself in administration.

Their funds would also become inaccessible.

On Thursday (12 May), Coinbase caused further investor anxiety when it said it was struggling with some technical issues that meant some users were unable to make trades or access their cryptocurrency.

Communities on social networking site Reddit reported delays in withdrawals worth thousands of dollars.

But the issue was reported by the company to have been resolved a few hours later.

Further bad news for the firm has come from a lawsuit by disgruntled investors over Coinbase’s alleged false advertisement of a stablecoin - i.e. cryptocurrency that has its value partly based on real-world assets.

The group claims they lost millions after the exchange and the issuers of GYEN tokens misled them over its stability.

Neither Coinbase or GYEN’s issuer GMO-Z responded to requests for comment from Bloomberg, who broke the story.

What did Coinbase CEO Brian Armstrong say?

Coinbase co-founder and CEO Brian Armstrong tried to ease the anxieties among Coinbase’s users in a Twitter thread posted on Wednesday (11 May).

He sought to reassure users by insisting “your funds are safe at Coinbase”.

Mr Armstrong said there was “no risk of bankruptcy” at the firm and that the statement had only been included due to new requirements from the US Securities and Exchange Commission (SEC) - the public body that regulates Wall Street.

“We included a new risk factor based on an SEC requirement called SAB 121, which is a newly required disclosure for public companies that hold crypto assets for third parties,” he said.

Mr Armstrong apologised to users and highlighted Coinbase’s crypto wallet which would give users more power over their assets.