What happened
Cryptocurrency values and the stocks of the companies that depend on those tokens continued to fall on Thursday, continuing a rough six-month stretch for the whole sector.
As of 2:30 p.m. ET, Bitcoin (CRYPTO: BTC) had fallen by 5.2% over the prior 24 hours to a level near $19,000, while Ethereum (CRYPTO: ETH) was down 7.1% to about $1,030. That drop in cryptocurrencies has also hurt trading and storage platform Coinbase (NASDAQ: COIN), which fell as much as 11.3% during Thursday's session and is currently down 4.4%, and Silvergate Capital (NYSE: SI), which dropped by as much as 11.2% and is now down 5.1%.
So what
The massive shakeout of leveraged positions in cryptocurrencies continues, and some big companies are taking a fall. On Thursday, it was reported that FTX could acquire BlockFi, a crypto lender, for just $25 million. Early in June, BlockFi was close to completing a new funding round that would have valued it at $1 billion.
This latest news follows the ordered liquidation of hedge fund Three Arrows Capital after the collapse of the Luna token and multiple other big failures in the crypto market.
What we're learning generally is that there was far more leverage in cryptocurrency than we previously knew because of off-chain borrowing by big hedge funds or individual investors. (This contrasts with on-chain borrowing, where anyone can see the borrowing in the market.) When these investors are involved in a situation that blows up -- like the Luna collapse -- it can cause a cascading effect on the market as positions are liquidated. This then uncovers more risks at exchanges and other lenders.
It's understandable why Bitcoin and Ethereum continue to fall as liquidations take place, but what about Coinbase and Silvergate? Traders are concerned that both could be in tough financial positions, and fear that they may be exposed to unidentified risks from borrowers on their platforms. To get those potential risks out of their own portfolios, traders are selling the stocks.
Now what
Risks continue to be unearthed in the crypto market, and this week's news represents just a few more steps in what will be a long process. While I'm bullish on the crypto space in general, I think it's worth acknowledging that there will likely be more bailouts and failures in cryptocurrency before the market stabilizes.
It's times like this that balance sheets and risk profiles matter. Coinbase has about $6 billion in cash on its balance sheet, so it should be able to weather this storm. We don't have any indications (yet) that it's had issues with liquidations in the same way smaller lenders have. So if the crypto market recovers, Coinbase should do well over the long term.
By contrast, I'm watching Silvergate closely as its second-quarter report date approaches. The company is a lender and may have risks on the balance sheet that investors didn't know about, similar to those that have been discovered at other crypto lenders. I'll stay on the sidelines of this stock until we know more.
Investors would be wise to be cautious, but they should keep looking for opportunities in the crypto space. Builders continue to build, and there's a bright future ahead for the industry. It just may take a while to get there.
10 stocks we like better than Coinbase Global, Inc.
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Coinbase Global, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 2, 2022
Travis Hoium has positions in Coinbase Global, Inc. and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Inc., and Ethereum. The Motley Fool recommends Silvergate Capital Corporation. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
