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Coinbase Debt Was ‘Canary in the Coal Mine’ for Crypto Meltdown

(Bloomberg) — In the wake of the spectacular meltdown of Sam Bankman-Fried’s crypto empire, many investors are looking for early warning signs that may have foretold the contagion that was about to unfold. One possibility? Coinbase Global Inc.’s junk bonds.

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The largest US digital-asset trading platform has seen the price of its bonds plunge this year. In early January, the price for one of its most active notes was at about 92 cents. It then slid to about 77 cents in April before dropping to 63 cents amid the Terra Luna market crash in May. The bonds traded around 53 cents on the dollar — a level typically associated with distressed — in early morning trading in New York Wednesday, according to Trace bond trading data.

The drop is largely attributed to the so-called crypto winter that has leveled digital currency markets this year. But for some industry participants, the plunge was an omen of the carnage that would soon be unleashed.

The crypto exchange’s debt can be described as a “canary in the coal mine,” Bloomberg Intelligence credit analyst David Havens said in a phone interview. In particular, “something that really grabbed attention” back in May was Coinbase’s noting that clients could be treated as general unsecured creditors if the company went bankrupt.

This caught a lot of people by surprise and raised several questions, according to Havens: “Bankruptcy? What were they seeing, hearing, feeling that compelled the lawyers to include that statement at that time,” he said. And secondly: “Clients. Wait, what? We may be pari passu to bondholders, not segregated as we’d be at a regular exchange?”

At the time, Coinbase chief executive officer Brian Armstrong said the firm added the risk disclosure due to a new US Securities and Exchange Commission accounting requirement.

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It contributed to the decline in the bonds and proved to be one of the indicators of what was to come.

The yield on Coinbase’s bonds is currently roughly between 13 and 15%. “We think this fully reflects ongoing crypto…

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