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Bitcoin (BTC) - $18,913.10 |
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Welcome to Crypto Long & Short Happy Fourth of July to all who celebrate! Hope you're lucky enough to have time off. Spend some of it doing something you love. This is the last of a three-part newsletter series about the risks facing crypto right now. Here are the three topics this newsletter series covers. - Price and macro risk (two weeks ago)
- Platform and protocol risk (last week)
- Public company risk (this week)
This week we'll take a look at public company risk. Public companies are widely misunderstood, especially among the bitcoin and crypto crowd. That's not really surprising. The whole thing is (enter: 100% of my cynicism) intentionally convoluted and confusing to make the investment bankers, lawyers and insiders on Wall Street feel smart. I mean, these are called "public companies," but they are decidedly private, for-profit enterprises. Words matter, but just not in high finance, apparently. – George Kaloudis |
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For context, I want to lay out what it means to "go public" or "be a public company." A company goes public by selling some or all of its equity to a group of underwriters, who then issue stock to trade openly on exchanges like the Nasdaq or New York Stock Exchange. It's "public" in that (almost) anyone can invest in this equity freely (in practice, it isn't truly open). Also its financial information – from quarterly income statements to stock price – is publicly shared. Companies do this to receive an injection of money to aid growth or reward long-time equity holders and have easier access to future capital. These seem to be reasonable reasons to go public, and a lot of the time it works out. But for more context, I'm going to tell you what I think about going public. I think it's dumb. Going public puts the focus on short-term growth over long-term growth, and that could spell disaster under improper management for even the best companies. Corporations can survive longer and are best served when they have the long term in mind. Going public, in most jurisdictions, requires quarterly financial reporting, which is generally onerous. Additionally, you have public shareholders who demand the stock performs well or else they will tank your equity value of the company by selling the stock en masse. What's more, the capital markets have become exceedingly more open to private companies as a glut of private capital (debt and equity alike) is on the sideline looking for things to put money into. I'm mostly being fantastical for dramatic effect, but in general, going public isn't a one-size-fits-all solution. Especially in crypto. Hence this week's focus on risks posed by public companies in the Hard Times of crypto … Public company risk During the last bear market in 2018, there were no public companies in crypto. Now we have trading platform Coinbase (COIN) and an army of public crypto mining companies. This is how their stock prices have performed this year (COIN, CORZ, HUT, HIVE, RIOT, MARA). |
That's not good. Normally, if these companies were private, they would be trying to figure out how to survive. Take Coinbase for instance. It has been around since 2012, and so it has survived multiple bear markets. But this time around, it has the public shareholder to worry about. And the highly liquid, public shareholder is far more impatient than the highly illiquid, private shareholder. Going public has led to an unsavory situation for Coinbase. The insistence for consistent, infinite, short-term growth by shareholders led to an immense expansion in headcount. At the same time, Coinbase also scrambled to increase revenue by listing countless (and sometimes off-the-wall) digital assets on its platform. That strategy generally works in a bull market, but the market downturn has led to an absolute PR nightmare when Coinbase cut back on hiring in May, which rolled into rescinding new job offers. The blowback in turn led to a pointed tweet thread from co-founder and CEO Brian Armstrong urging dissenters to quit, following an employee petition to remove executives from the company, which was then followed promptly by the exchange laying off 18% of its workforce. That same insistence for growth combined with post-Global Financial Crisis cheap capital has hit mining companies, as well. Miners were able to cheaply finance mining equipment and facilities, all while thriving without needing to sell much of the bitcoin they mined since the price of bitcoin was high and capital was cheap. Now that bitcoin is dipping and interest rates are increasing, public miners may be forced to dig into their coffers to sell some of the 40,000 BTC they collectively hold to survive. While 40,000 BTC of potential selling might feel like a bad thing, Castle Island Venture's Nic Carter pointed out in a podcast that miner selling marked the last move down during the 2018 bear market. So while we could be in for more pain, perhaps the light at the end of the tunnel is visible. And to be undeniably clear, I'm not suggesting that going public is the sole reason these companies are struggling. In fact, these companies would be struggling if they were still private. Many companies are struggling across many industries, not just crypto exchanges and miners. I am suggesting that a company going public while it is still in growth mode with a business model highly dependent on the price of highly volatile assets was potentially unadvisable.
The only thing worse than being a private company going through a tough time is being a public company going through a tough time. I think most of these companies will be fine, but it will be tough going for the foreseeable future.
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Compass Mining's CEO and CFO have resigned, effective immediately. - TAKEAWAY: CEO Whit Gibbs and Chief Financial Officer Jodie Fisher resigned from bitcoin mining hosting and brokerage services firm Compass Mining amid multiple setbacks and disappointments, according to an emailed statement. A former Compass Mining employee, who didn't want to be identified for fear of litigation, said, "Lots of things are very poorly managed and executed on, which gives people the perception that they're shady." Read more here.
Crypto brokerage Voyager Digital issued a notice of default to Three Arrows Capital. - TAKEAWAY: Three Arrows Capital, a beleaguered crypto hedge fund, has failed to make the required payments of its loans of 15,250 BTC and $350 million in USDC to Voyager Digital. As a result, Voyager has issued a default notice to recover the loans. Voyager CEO Stephen Ehrlich said, "We are working diligently and expeditiously to strengthen our balance sheet and pursuing options so we can continue to meet customer liquidity demands." Read more here.
Bybit will settle options contracts in USDC. - TAKEAWAY: The crypto derivatives exchange will offer options contract settlement using USDC. Against the backdrop of the bearish cycle, Bybit chose USDC, the second-largest stablecoin by market cap, for its ability to enable stable prices for the duration of each contract. Bybit now supports USDT, BTC, ETH and USDC as collateral. The announcement to use USDC comes a week after Bybit indicated that it would reduce its workforce and consolidate teams. Read more here.
Crypto exchange OKX plans to increase its headcount by 30%. - TAKEAWAY: While many crypto exchanges have had hiring freezes and layoffs, OKX wants to increase its staff by 30%, according to Lennix Lai, the platform's director of financial markets. The trading platform now is "mostly focused on increasing our headcount on product and tech," Lai said. The company likes the idea of employees working from the office, but it offers them "a lot of flexibility and freedom to pick where they work." Read more here.
Goldman Sachs cut Coinbase's rating to "sell." - TAKEAWAY: Goldman Sachs cut its rating on Coinbase to "sell" from "neutral" and decreased its price target to $45 from $70. In a report, the bank said Coinbase will need to make substantial reductions to its cost base to "stem the resulting cash burn" as retail trading activity slows down. The investment banking giant added that Coinbase faces a difficult choice between shareholder dilution and significant reductions in "effective employee compensation." Read more here.
– Sage D. Young |
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Public Crypto Companies Are Under Pressure