Crypto Gamblers: How Are the Firms Who Bet Big in Digital Assets Doing?

Key Points

• Firms who have made big bets on crypto got burnt in Q2, recent corporate earnings releases have revealed.
• Coinbase, Block and MicroStrategy all declared significant impairment charges on their crypto investments in Q2.
• But with crypto’s long-term prospects looking healthy, analysts suspect better times lay ahead.

Crypto Winter Chills Industry

While the cryptocurrency market rally over the past few weeks has lifted spirits, 2022 has so far undoubtedly been an ugly year for the crypto industry. At just under $1.15 trillion, the total market capitalization of cryptocurrency markets is still over 60% down from its November 2021 peaks above $3 trillion. At current levels in the $24,000s, Bitcoin is close to 65% down versus its 2021 highs around $69,000.

The drawdown in prices, largely as a result of a deterioration in macroeconomic factors (elevated inflation forcing central banks like the Fed to pursue aggressive monetary tightening), has had a chilling impact across an increasingly leveraged cryptocurrency space.

The collapse of Terra’s algorithmic stablecoin UST and LUNA token in June resulted in the blow-up of one of the largest crypto hedge funds Three Arrows Capital, which was subsequently followed by a chain of crypto lending services halting withdrawals due to market conditions, the most high profile of which being now bankrupt Celsius Network.

According to court filings made in Celsius’ bankruptcy proceedings, the sharp decline in crypto prices has inflicted a more than $1 billion hole on the company’s balance sheet. But should cryptocurrency prices post a sharp recovery into the year’s end, Celsius could easily see its balance sheet return to the green.

Big Crypto Bets: Are They Paying Off?

A series of publicly traded US crypto firms have been reporting earnings as of late and the picture has, unsurprisingly, been ugly. According to earnings released earlier this week, the largest US-based cryptocurrency exchange Coinbase saw its revenues plunge 61% in Q2 given a sharp decline in trading volumes as well as the decline in prices. Coinbase reported an after-tax loss of $1.1 billion in Q2.

A large portion of this loss was a result of a $446 million impairment charge on its crypto and venture investments. Coinbase is not the only crypto firm to have revealed significant losses on its crypto investments in Q2.

Jack Dorsey’s digital-payments-focused company Block saw profits surge 29% YoY to $1.47 billion in the second quarter. However, the Bitcoin payments side of the business performed poorly. Cash App which supports BTC saw revenues fall 34% YoY to $1.79 billion, with profits coming in at just $41 million.

The company’s quarterly accounts revealed a $36 million impairment charge on its Bitcoin holdings in Q2 and said that it ended the quarter holding Bitcoin worth $160 million (as of 30 June).

Coinbase’s share price is down 65% this year, while Block’s is down 45%.

But Coinbase and Block’s crypto impairment charges pale in comparison with the losses reported by business software development and Bitcoin hodling firm MicroStrategy. The company lost $1.062 billion in Q2, with $917 million of this coming as a result of its paper losses on its Bitcoin holdings.

At the end of Q2, MicroStrategy was holding $1.988 billion worth of Bitcoin (129,699 BTC). Former MicroStrategy CEO Michael Saylor essentially turned the company into a Bitcoin holding vehicle when he announced the company’s first $250 million Bitcoin purchase back in 2020.

He has since stepped down from his role as head of the company in order to take on the role of executive chairman and focus on the firm’s Bitcoin acquisition strategy. MicroStrategy’s share price is down around 37% this year.

Long story short, crypto firms’ big digital asset bets haven’t gone well so far this year. But for most involved, the current cryptocurrency bear market isn’t their first rodeo. Global crypto adoption trends continue to move in a positive direction and regulations that will help crypto become “legit” in key markets like the US, EU and UK seem only a few years away at most.

Business strategists at the likes of Coinbase, Block and MicroStrategy, as well as their investors, will likely remain confident that better times are coming as macroeconomic conditions improve in 2023 and beyond.