Tesla, Coinbase, MicroStrategy could get swept up in crypto contagion. Will you?

Posted: 12 May 2022 6:20 pm

The stablecoin collapse that helped wipe out billions in crypto assets since Saturday is fueling fears of a contagion across financial markets. Here are three stocks with exposure. Are yours at risk, too?

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Government regulators have long warned of the risks of a run on stablecoins similar to what we saw the past few days that sent the value of TerraUSD (UST) and its related token LUNA tumbling. The rout has already wiped as much as $511 billion in crypto assets since Saturday.

In November, the President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency warned of “systemic risk” should stablecoins break off their peg to the dollar as we’ve seen this week. In addition to TerraUSD, the stablecoin Tether traded below $1 on Thursday, though it bounced back.

A run on stablecoins could result in “a self-reinforcing cycle of redemptions and fire sales of reserve assets,” the government report showed.

Those ramifications could go well beyond the crypto market. Among those at risk are companies that hold such digital assets in their balance sheets. Here are three of them, and how to check on your holdings.

Tesla’s $2.48 billion Bitcoin hoard

While Bitcoin wasn’t the main crypto asset that became the target of the recent fire-sale, it got swept by the rout in stablecoins, worsening its decline. The biggest cryptocurrency has plunged to as low as $26,292 on Thursday, from $35,805 just a week earlier.

That’s bad news for Bitcoin holders or what is now known as hodlers — crypto slang for “Hold on for dear life.” Tesla (TSLA) is one of them. The company reported Bitcoin holdings worth $2.48 billion in its first quarter filing with the Securities and Exchange Commission.

In that document filed April 19, Tesla cited the risks posed by fluctuations in the market. “If we hold digital assets and their values decrease relative to our purchase prices, our financial condition may be harmed,” it said.

“Any decrease in their fair values below our carrying values for such assets at any time subsequent to their acquisition will require us to recognize impairment charges,” Tesla said. The company “may make no upward revisions for any market price increases until a sale, which may adversely affect our operating results in any period in which such impairment occurs.”

That was the case when Tesla posted $27 million of impairment losses as a result of the decline in the value of its Bitcoin holdings in the first quarter. In the same three-month period, the company also realized gains of $128 million after selling a portion of those digital assets, according to the SEC document.

While crypto risks won’t break the electric vehicle maker, which is valued at $752 billion, the impact on Tesla could further shake investor sentiment toward Bitcoin.

Coinbase’s $1.33 billion crypto assets

While Coinbase (COIN)’s revenue comes mainly from transactions within its platform, the exchange said in August 2021, it will invest $500 million as well as 10% of quarterly net income into a diversified portfolio of crypto assets.

As of March 31, the crypto exchange held $765.4 million of crypto assets for investment and operating purposes at impaired cost. In total, it had $1.33 billion in crypto, including those held for operating purposes according to its first quarter filing with the SEC.

“Our future earnings and cash flows will be impacted when we choose to monetize our crypto assets and the variability of our earnings will be dependent on the future fair value of such crypto assets,” Coinbase said.

The company also said it had $179.9 million of USDC, a stablecoin, as of March 31. It treats those USDC holdings as a liquidity resource. How much those USDC holdings are actually worth now is the question.

(Coinbase’s earnings news this week also gave crypto investors a new reason to worry, and the stock dropped sharply. Read story.)

MicroStrategy’s $3 billion digital assets

MicroStrategy (MSTR) reported digital assets worth over $2.89 billion in its first quarter filing with the SEC, including 129,218 Bitcoins. The company accumulated its holdings at an average price of $30,700 per Bitcoin, well above the current price of $28,458.34, according to CoinDesk.

The company posted $170.1 million in digital asset impairment losses in the first quarter, contributing to its $130.8 million net loss for that period.

MicroStrategy has been using its Bitcoin as collateral in capital raising. That puts its creditors also at risk, should the value of the cryptocurrency keep declining.

At the end of the first quarter, the company had $1.7 billion in debt under its convertible notes, $500 million under its 2028 secured notes, and $205 million in outstanding borrowings under its 2025 secured term loan.

MicroStrategy said its debt and interest expense could have “important consequences” to the company including limiting its ability to gain additional financing for future acquisition of more Bitcoin and working capital.

As of March 31, about 19,466 of the bitcoins held by MacroStrategy serve as part of the collateral for its 2025 Secured Term Loan, it said in its earnings release.

Fire sales and the snowball effect; are your stocks at risk?

The better news for investors is that companies will have disclosed crypto holdings in SEC filings. You can look there to assess whether your stocks are exposed, as these three are. That’s particularly important if stablecoin problems spread.

In November, the President’s Working Group had warned “fire sales of reserve assets could disrupt critical funding markets, depending on the type and volume of reserve assets involved.”

The Federal Reserve echoed the same concern in its financial stability report this week. “The increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies may amplify volatility in demand for stablecoins and heighten redemption risks,” the Fed said.

There’s also the risk the impact of the stablecoin meltdown could spillover to the broad stock market, with shares of tech companies most at risk, according to Phil Streible, chief market strategist at Blue Line Futures.

“It will be a snowball effect,” Streible told Finder. Once investors “start losing money on crypto, they begin to get worried about other exposures they have in their portfolio.” That could trigger more selloff in the stock market, starting with tech stocks that have previously delivered hefty returns, he said.

Interested in cryptocurrency? Learn more about the basics with our beginner’s guide to Bitcoin, dive deeper by learning about Ethereum and see what blockchain can do with our simple guide to DeFi.

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