S&P Downgrades Coinbase to BB Rating Amid Poor H1

Following its most recent earnings report this year, S&P Global reduced major American cryptocurrency exchange Coinbase’s long-term issuers’ credit score from BB+ to BB status.

In a report published on August 11, the rating agency announced the downgrading, citing Coinbase’s subpar performance in the H1 of 2022 as the primary cause. Additionally noted was the increased risk of competition in the market for bitcoin exchanges, with Coinbase losing market share to rivals this year.

Concerns compromise the company’s capacity to run effectively by carefully managing operating expenses over the length of the crypto market downturn, which is also reflected in the gloomy forecast.

The rating also considered the possibility of “additional market share deterioration,” which would be brought on by the competitive environment and regulatory risk.

The rating agency pointed out that while overall cryptocurrency spot trading activity across all venues decreased only 3% quarter over quarter, total trading volume at Coinbase fell 30%, resulting in a smaller market share.

Reasons for The Downgrade

The statement acknowledged that market-makers and high-frequency trading companies, of which Coinbase has a far smaller market share, have become increasingly dominant in spot trading.

S&P Global points out that the ongoing cryptocurrency bear market has had an impact, with total assets on Coinbase falling 63% to $96 billion from the first quarter due to weaker cryptocurrency valuations and net withdrawals from financial institutions.

The decision by Binance to discontinue its global Bitcoin trading fees also caused the rating agency to think that Coinbase might need to reevaluate its fee structures, which continue to be a major source of income for the company:

“The risk of fee compression in Coinbase’s retail channel, which produced roughly 80% of the company’s total revenues in the H1 of 2022, could be increased, in our opinion, by higher trading costs at Coinbase compared to peers and such aggressive price measures by competitors.”

The current investigation into Coinbase’s staking operations and the classification of other listed cryptocurrency tokens raise concerns about governmental regulations as well. In July 2022, the U.S. SEC also accused a previous Coinbase employee of securities fraud, further putting the exchange under scrutiny.

S&P Global anticipates Coinbase to maintain “low overall risk” despite the downgrade and macroeconomic environment worsening the recent bear market in cryptocurrencies.