Coinbase on Wednesday said it had no counterparty exposure to collapsed crypto firms Celsius, Three Arrows Capital and Voyager Digital, seeking to allay fears about the impact of a liquidity crisis on its business.
The U.S. crypto exchange also said it had “no financing exposure” to the firms, which each collapsed into bankruptcy after a plunge in digital token prices set off a cascade of liquidations in highly leveraged positions.
Coinbase says it did, however, make a “non-material” investment in Terraform Labs, the Singapore-based company behind failed stablecoin project Terra, through its venture capital arm.
“Many of these firms were overleveraged with short-term liabilities mismatched against longer duration illiquid assets,” the company said.
“We have not engaged in these types of risky lending practices and instead have focused on building our financing business with prudence and deliberate focus on the client,” it added.
Coinbase shares climbed more than 14% Wednesday. The stock has erased about 70% of its value since the start of 2022, as interest rate hikes by the Federal Reserve shook investors in both crypto and stocks.
The crypto market has been in a state of disarray ever since the demise of Terra, a so-called “algorithmic” stablecoin that tried to maintain a $1 value using code.
This led to liquidity issues at Celsius and Three Arrows Capital, or 3AC, two companies that made risky crypto gambles using borrowed funds.
As cryptocurrencies started falling this year, investors wanted to take their funds out of firms like Celsius and 3AC. But a drop in the value of the assets held by such companies meant they were unable to process those redemption requests.
As a result, Celsius, Voyager and others halted withdrawals before eventually filing for bankruptcy protection.
Investors are hoping the Fed will be less aggressive than feared with an expected hike in interest rates next week.
Central banks are racing to tame runaway inflation with tighter monetary policy, but this has spooked stocks and other risky assets — crypto included — which benefited from a flood of stimulus during the Covid-19 pandemic.