Is it safe to store cryptocurrency on Coinbase?

Coinbase global (PIECE OF MONEY -9.96%) is a gateway to the cryptoeconomy. It provides a number of financial services to retail traders and institutional investors, but its platform is best known as a cryptocurrency exchange. Coinbase supports the buying and selling of 166 crypto assets and offers custodial wallet services, which means investors can store these assets directly on the platform. It’s certainly convenient, but is it safe? Investors should understand the risks associated with custodial wallets before making a decision, as a relevant disclosure Coinbase just added to its regulatory filings makes this all too clear.

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Investors could become unsecured creditors

On May 10, Coinbase filed its latest Form 10-Q with the United States Securities and Exchange Commission (SEC). In the section titled Risk factorsthe company disclosed the following information:

Since crypto assets held in custody may be considered the property of a bankruptcy estate, in the event of bankruptcy, crypto assets held by us in custody on behalf of our clients could be subject to bankruptcy proceedings. bankruptcy and these customers could be treated as our general unsecured creditors.

What does that mean? In the event of bankruptcy, investors could lose their crypto. Coinbase would liquidate all of its platform assets to pay off its secured creditors. After that, if there was any money left, unsecured creditors (like you) would be next.

This disclosure highlights the problematic lack of regulation surrounding the crypto industry. If a traditional brokerage company went bankrupt, the company would not be able to touch the securities held on behalf of its clients. The safety of your stocks would be guaranteed. But the same protections have yet to be extended to investors on crypto trading platforms.

So here is the question: What are the chances of bankruptcy?

Bankruptcy is unlikely, but possible

At the end of the first quarter, Coinbase had $6.1 billion in cash and cash equivalents on its balance sheet, compared to $3.4 billion in long-term debt. This puts the business in a fairly strong financial position, which makes bankruptcy unlikely. CEO Brian Armstrong expressed the same sentiment on Twitter recently, assuring investors that their funds were safe at Coinbase and that there was “no risk of bankruptcy.”

However, credit rating agency Moody’s slapped Coinbase’s debt with a junk bond rating, citing regulatory uncertainty and volatility in the crypto market. Specifically, Coinbase generates the vast majority of its revenue from transaction fees, which are assessed based on the value and quantity of the asset being bought or sold. This means that a prolonged crypto market crash could hammer Coinbase’s earnings and significantly increase its risk of bankruptcy.

Luckily for investors worried about this possibility, there are alternatives to custodial wallets. For example, self-custody software wallets like MetaMask or Coinbase Wallet give investors complete ownership of their crypto assets. However, self-custody wallets are usually secured with a 12-word recovery phrase. If you ever lost or forgot this phrase, your cryptocurrency would effectively be gone.

Is your cryptocurrency safe on Coinbase?

Investors have no reason to panic. Yes, storing assets in a custodial wallet comes with some risk, but Coinbase has a pretty strong balance sheet and it’s always been pretty profitable. Moreover, the company has invested heavily in cybersecurity and has never lost customer funds due to a breach. From this perspective, your cryptocurrency seems relatively safe on Coinbase.

However, every investor and every situation is different, so the right answer depends on the person. If your decision to store crypto on Coinbase is keeping you up at night, consider making a change.

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