Bank of America (BofA) has downgraded the shares of crypto exchange platform Coinbase following the collapse of the FTX crypto exchange while warning about contagion risks in the volatile sector.
The FTX crisis means that Coinbase (COIN) will likely face several new headwinds in the near or medium term, BofA analysts said in a note to clients. “As a result, we downgrade COIN to Neutral from Buy and reduce our estimates. We feel confident that COIN is not ‘another FTX’ (only $15M of deposits on FTX platform per a Coinbase blog post and $5B of cash on hand as of 9/30), but that does not make them immune from the broader fallout within the crypto ecosystem,” the note said, according to Yahoo Finance.
BofA has set a target of $50 for COIN shares, down from its earlier $77 target. COIN, which is trading around $45 as of Nov. 18, fell by over 18 percent on Friday and is down by more than 82 percent year-to-date.
The note cited three reasons for downgrading COIN. First, it expects lower trading activity on Coinbase by retail traders in the aftermath of the FTX collapse.
Secondly, while regulatory clarity on the crypto industry was expected by some traders by next year, such developments are projected to be pushed back for now.
Thirdly, the note estimates that it might take some time for crypto traders to fully realize the consequences of the FTX debacle, which would dampen the industry further. “Contagion risk and the broader fallout from the FTX collapse could linger,” the note warned, according to CNBC.
The note also cited a recent interview by Coinbase CFO Alesia Haas in which she said that the decline in the price of bitcoin and other crypto assets would affect the company’s revenues. Bitcoin is down by around 65 percent so far this year.
FTX Collapse Effect
More than one million creditors are expected to be affected by the fallout from the FTX crisis. The company had filed for bankruptcy after a depositor run ended up triggering a liquidity crisis. Entities like the Ontario Teachers’ Pension Plan (OTPP) which had invested $95 million into FTX are now caught in a tough spot.
FTX’s new CEO John Ray, who is overseeing the company’s bankruptcy proceedings, recently blasted the firm for its poor management and pointed out that control was concentrated in the hands of a small group of “potentially compromised” individuals.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray said in a sworn declaration on Nov. 17.
FTX’s earlier CEO and founder Sam Bankman-Fried had resigned on Nov. 11, the day when the company filed for bankruptcy.
Gary Wang, co-founder of FTX; Nishad Singh, the engineering director; and Caroline Ellison, who ran Bankman-Fried’s trading venture Alameda Research were all fired from their posts after Ray took over.