According to Coinbase, all client funds are retained in a 1:1 ratio rather than being lent out for profit.
The most well-known cryptocurrency exchange in the US, Coinbase, claims to have had no exposure to the now-defunct crypto loan companies Celsius, Voyager, and Three Arrows Capital. The company also explained how it handles risk in a different way from previous businesses, claiming that it won’t have comparable liquidity difficulties.
What Makes Coinbase Unique
The exchange has “no funding exposure,” as stated on Coinbase’s blog on Wednesday, to any of the aforementioned companies. Additionally, it reiterated that clients’ assets are kept 1:1 and refrained from any of the “risky lending methods” that contributed to the failure of each organization.
Given their excessively leveraged short-term obligations versus “longer duration illiquid assets,” such lending organizations’ aggregate failure was “foreseeable,” according to Coinbase. Similar criticism was leveled at the industry’s most current risk-management policies by Galaxy Digital CEO Mike Novogratz on Tuesday, who called them “inane.”
“We believe these market participants were caught up in the frenzy of a crypto bull market and forgot the basics of risk management, said Coinbase. “Unhedged bets, huge investments in the Terra ecosystem, and massive leverage provided to and deployed by 3AC meant that risk was too high and too concentrated.”
Regarding Terra, Coinbase acknowledged that Terraform Labs, its principal developer, received non-material contributions from its venture program. To far, the firm has not experienced a loss from its financing book, exposure to counterparty bankruptcy, gating for client withdrawals, or modifications to trading clients’ access to credit.
The company provided a set of guidelines it adheres to while controlling counterparty credit risk. Among them is the stress testing of their exposures throughout Monte Carlo simulations, which employ probability models to forecast specific results when random variables are present.
The conversation often encourages preparing for “internal shortcomings” and “external surprises” and emphasizing “base hits” rather than “home runs.”
“Ultimately, it may still take time for the broader industry to learn the right lessons from the systemic deficiencies we have seen,” concluded the blog.
Recovery Soon to Come?
The last week has seen a shift in market attitude as both Bitcoin and Ethereum burst above price levels last seen in early June.
According to fresh data from Glassnode, Bitcoin’s cyclical bottom may have formed at $20,000 as investors switch into “accumulation mode.” The asset has now crossed back above the $22,000 realized price, which traditionally indicates a price bottom.