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Crypto Crash Exposes Robinhood and Coinbase To Predators

A year can be a lifetime in the cryptocurrency world as major players are reeling from heavy losses.
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It was the Summer of Love for cryptocurrency.

On June 29, 2021, Coinbase Global  (COIN)  and Voyager Digital  (VYGVF) both had their market debuts.

Coinbase shares soared on that first day and finished at $328.28, well above the reference price of $250 set the previous night. Voyager Digital shares ended at $16.60.

'When the Weeding is Done'

This was the very same day that House Speaker Nancy Pelosi introduced a resolution to establish a select committee to probe the Jan. 6 insurrection. But everything was all sunshine and roses in crypto world.

One month later, the online brokerage Robinhood Markets  (HOOD)  went public, finished its first trading day at $34.82, down more than 8%.

At the close of the market on June 28 of this year, Coinbase was going for $51.18 a share. Voyager Digital closed at 41 cents a share and Robinhood Markets was worth $8.66 a share.

"I think what is happening in the crypto market and stocks associated with crypto is part of the maturation process," said Scott Sheridan, CEO of the brokerage firm tastyworks. "I also think much of the appeal here was being generated from fully valued equity prices, which have since come down."

In terms of maturation, Sheridan added, "I think it’s reasonable to expect ups and downs and just like we have seen in past instances, like the dot-com era, eventually a weeding out process comes along and culls the herd a bit."

"That’s how it should be," he said. "When the weeding out is done, you hope to be left with the strongest companies."

Do The Math

All three of these companies climbed dramatically in the cryptocurrency whirlwind and now all three have seen their market capitalization and share value slide when the ill winds started to blow.

This week Voyager Digital issued a notice of default to hedge fund Three Arrows Capital, which has been ordered to liquidate in the British Virgin Islands by a court, due to the fund's failure to make required payments on a loan.

The numbers are pretty scary.

On that day way back in June, Robinhood Markets had a market cap of about $29 billion. One year later, that number was down to around $7.4 billion.

Coinbase Global's market cap stood at $66.75 billion 12 months ago compared with the current figure of $13.40 billion. 

And Voyager Digital's market cap totaled about $3.2 billion. And now? The number has dwindled to $94.7 million.

At these valuation levels, the three companies are at the mercy of any predator and fragile targets for a move towards consolidation in the sector. Voyager Digital's situation is even worse given its stock price.

Both Bitcoin, the most popular digital currency, and Ether, the Ethereum platform token and second largest cryptocurrency, are down dramatically. 

Sister tokens Luna and UST, or TerraUSD, of the Terra ecosystem have collapsed and the lender Celsius Network has gone silent after suspending fund withdrawals and all other operations on its platform. 

'Crypto Does Not Exist in a Vacuum'

Robinhood Markets surged on June 27 before being halted from trading on the Nasdaq following reports that FTX.com was looking to buy the trading platform.

FTX CEO Sam Bankman-Fried quickly issued a denial that FTX was pursuing an acquisition, but he left the door open to future deals by disclosing that he was interested in possible partnerships with Robinhood.

Bankman-Fried, who has become something of a "savior" of the crypto industry, has warned there could be more bad news coming.

Martin Hiesboeck, head of blockchain and crypto research at Uphold, said that "the current crisis clearly shows that as much as hard-core crypto fans want to believe, crypto does not exist in a vacuum."

"Crypto trading, crypto asset management and crypto lending all exist side-by-side with traditional financial operations," he said. 

'A Critical Moment for Crypto'

Hiesboeck said "this is a critical moment for crypto as regulators realize that they have to take the space seriously, while crypto companies need to wake up to the fact that they need to play by the rules."

"These wild swings are not unusual in crypto, and the broader market uncertainty clearly made matters worse," said Christian Catalini, founder of the MIT Cryptoeconomics Lab, and a research scientist at the MIT Sloan School. "The technology is still at an extremely early stage, and will take multiple years to deliver on its potential."

What's unusual, he said, is the ability to track its progress day by day.

"Imagine if you had been able to track the stock price of Apple, Microsoft or really any other technology company from the day it was incorporated and well before it went public," Catalini said. "You probably would have witnessed similar, massive swings in price."

'A Lot of Drama'

"While we may see some consolidations, I don't see founder-led companies looking to be acquired just because of the correction," he said. "If anything, the correction will increase the quality bar for new projects being funded, something that will be healthy for the space."

George Geis, law professor at the University of Virginia, said he thinks the current crypto situation differs from the dot-com debacle of yesteryear, "though there are certainly some parallels--such as questionable business models and vast waves of capital coming into this space."

"I do think there will be a wave of consolidation," he said. "Companies will be scrambling to avoid becoming the next 'Celsius,' and traditional financial services firms are carefully considering whether now is the right time to acquire a crypto foothold."

Geis said he would also keep a close eye on some of the crypto whales, such as FTX, "who seem to be quite interested in consolidation opportunities."

"It’s an interesting moment for crypto, and I expect a lot of drama in the coming months," he said.