Coinbase has upped the size of its bond sale from a planned $1.5 billion to $2 billion given the unexpected flood of bids from private investors.

Coinbase, a cryptocurrency exchange founded in June 2012, has become a gatekeeper in the cryptocurrency industry. Most of the thousands of coins that have been introduced into the marketplace will likely fail: a listing at Coinbase has become a mantle of legitimacy, in much the same way that presence on any well-known index can be for a particular stock.

This is known as the “Coinbase effect.” It has given the company a peculiar importance, and that in turn has whetted the interests of bond buyers. 

It appears that Coinbase could have gone a good deal higher than $2 billion. Bloomberg, citing “a person with knowledge of the matter,” says that at least $7 billion of orders poured in, and it calls this level of interest a big endorsement of the exchange and of cryptocurrencies from junk-bond investors.  

Non-junky junk bonds

The new bonds are rated just one step below investment grade.

There are two bonds involved: one that matures on October 1, 2028, that will carry a coupon of 3.375% per year, and another maturing on October 1, 2031, with a coupon of 3.625% per year. 

These interest rates, for both the seven and the 10-year bonds, are lower than the levels originally discussed, analysts say. This fact too reflects the high level of confidence in the issuing institution. 

Crypto has long been a sector in which most of the money borrowed comes from venture capitalists. But now other debt investors, such as pension funds and hedge funds, are moving in, at least where they believe the institutions are sound.

Remembering MicroStrategy

There was another recent example of this. MicroStrategy Inc., a company that began life as a software developer but that has become an important digital-asset investor, and so in effect, a digital asset play for other investors, sold $500 million of notes in June 2021 to finance its purchase of Bitcoin.

By way of context: in August 2020, MicroStrategy invested $250 million in bitcoin as a treasury reserve asset. It said that this was because returns from cash are weakening, as is the dollar.

The company, under the influence of its CEO, Michael Saylor, subsequently made other large purchases of bitcoin, more than $2.2 billion in total, with an average publishing price of about $24,311 per bitcoin.  The decision does not now appear to be a wild one, with bitcoin’s price near $48,000. 

Indeed, about half a year before the June notes sale mentioned above, Saylor praised himself for the balance-sheet management that he believes the bitcoin purchases represent. He said that “We [at MicroStrategy] believe the proactive management of our balance sheet, combined with the improved revenue and profitability performance of the Company have been significant factors in the recent appreciation in our stock price.”

Coinbase is not riskless

Coinbase’s bond issuance is obviously a good deal larger than MicroStrategy’s note issuance from June. And it is not without risk.

Julie Chariall, an analyst with Bloomberg Intelligence, pointed out that Coinbase is a “strong company and a leader in crypto trading, but it’s looking to do more to diversify away from that, which can be a volatile business.” Whenever a company moves outside of its core strengths it enhances volatility. It may lose big in the face of unexpected developments.

Coinbase’s chief financial officer, Alesia Haas, explained some of the company’s expansion plans in a recent blog post. She said that “[We] will become the first publicly-traded company to hold Ethereum, Proof of Stake assets, DeFi tokens, and many other crypto assets supported for trading on our platform, in addition to Bitcoin, on our balance sheet.”

It is a tribute to the mainstreamization of crypto that this blog post has not made bond buyers skittish.