The InterPrime Newsletter - Issue #11 - What Coinbase does with their cash

See Brian’s tweet here. And read the release on their blog.

With inflation continuing to be on everyone’s mind, we thought that we would take a minute to reflect on the opposing force, and one that economists fear even more than inflation!

Deflation is defined as the reduction of the general level of prices in an economy. No one wants that!

In this edition of the newsletter, In addition to providing a market update we are going to analyze what Coinbase does with the cash on it’s balance-sheet.

Coinbase is synonymous with Crypto, and they are “The trusted venue for crypto trading and custody”. Today we are going to review the financials and learn what they do with their cash and crypto - how much do they have, which cryptos they hold, and where they keep them!

We were pleasantly surprised to learn that Coinbase is very conservative with their “Corporate Cash”, and that they primarily hold crypto for operating purposes and their “investment” in crypto is quite small compared to their cash position.

From the data above you can see Coinbase keeps 80% of their corporate cash super safe & liquid. They use a mix of bank accounts (both checking and savings), along with money market funds.

For their USDC, the underlying U.S. dollars are held by the issuer (Coinbase) at federally insured U.S. depository institutions and in approved investments on behalf of, and for the benefit of, holders of USDC (per their latest 10-Q filing).

Unsurprisingly, their largest individual crypto holdings are the crypto’s that have the highest transaction volumes on their platform (BTC, USDC & ETH). It’s difficult to pinpoint how much of these are for “investment purposes” versus their trading operations. These crypto assets are self custodied and are also held at various crypto transaction venues to facilitate their core business.

Their ~$250M of BTC is just about 20% of the BTC that Tesla holds! We will refrain from commenting on the MicroStrategy situation in this issue, but you can read our detailed view in our blog post here.

Those of you who have been thinking about parking a portion of your corporate cash in Crypto Assets should take heed of the conservative position that Coinbase has on the issue. Even, the premier crypto currency business in the world, holds just a small fraction of their balance-sheet assets in Bitcoin, Ethereum & other crypto currencies. 

As we cross the halfway point of 2021 it’s time to check on the markets. The current market theme revolves around rising consumer costs and inflation. And if inflation persists, will the Federal Reserve raise interest rates sooner than later.

Yesterday the Federal Reserve met to discuss economic and interest rate policy. There was no significant impact to the markets but there was an interesting shift in the dot plot.

The Federal Reserve dot plot shows the projections of what interest rates will be in the future.

Up until yesterday, the dot plot was showing interest rates to move higher in 2024. Thanks to the current economic recovery and rising inflation, the dot plot was adjusted to reflect two potential rate increases in 2023.

This would be a step in the direction of financial markets getting back to “normal”. But it is still 2 years away with a lot of potential roadblocks to pause any change in FED Policy.

Let’s now dive into each asset class and see what’s happening.

Thanks to the change in the dot plot, short term interest rates have some potential to move higher.

When we look at the US 2-year note, we can see it has finally moved outside of the balance area. This creates an expectation that the 2-year note can possibly move to 0.23% - 0.28%.

This is not a large move. But it would be welcomed by investors who put money to work in short term assets. i. e. Corporate cash managers - your humble authors included.

When we look at longer term bonds: US 10-year & 30-year. The picture has not changed much. Both are still gyrating inside of the balance areas. This has us expecting longer term rates to remain “easy” and beneficial to borrowers.

Mortgage rates should remain low and corporations will continue to refinance their debt at lower rates.

The Federal Reserve increased their projection on inflation to 3.4% above the previous 2.4%. This indicates consumer costs will continue to rise through the rest of 2021.

Stock indices have moved up and to the right through the first six months of 2021. This has taken each of the main indices to new all time highs.

Current year to date performance for the major indices is:

Even in the face of possible rate increase in 2023. We expect investors to buy price declines and the indices to trend higher.

Billionaire David Tepper was on CNBC this morning and gave a similar view when speaking with Scott Wapner. His quote,“I think the stock market is still fine”.

In last month’s market update we highlighted that Bitcoin looked ready to move toward ~ $24k. Bitcoin did move lower in jarring fashion but only made it to ~ $31k. Bitcoin still looks weak and currently the expectation is still for ~ $24k.

The shift in the Federal Reserve dot plot is encouraging. But until the Federal Reserve actually raises rates, the projections are meaningless. As we know it’s pretty tough to predict the future!

US economic recovery and sustained inflation will still be the focus through the end of 2021. That means stock investors should see appreciation, while bond investors will suffer in a low rate environment.

Please reach out to us if you want to talk about markets!

Episode 2 of Founders on Finance is up on our YouTube channel.

We interview Jonah Hanig of Rove Travel. Jonah is creating a premium experience for work travel and off sites. Be on the lookout for 2 new episodes in the coming weeks!

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