- Coinbase stated that it does not have any financial exposure to Voyager Digital or Three Arrows Capital.
- Coinbase points out that these crypto firms’ issues were ‘foreseeable’ as they were overleveraged.
- The crypto exchange has pointed out that it ‘stress tests its exposures’ through Monte Carlo Simulations.
Coinbase, a crypto exchange based in San Francisco, is known as Coinbase has stated It was not financially exposed to Voyager Digital, Celsius Network, or Three Arrows Capital. All three of these companies recently filed for bankruptcy.
Issues Facing Three Arrows Capital, Celsius Network and Voyager Digital were ‘Foreseeable.’
The Coinbase team stated that there was no financial exposure for the cryptocurrency exchange to counterparts in similar economic distress due to the current bear market conditions. They also added that the ongoing issues facing these firms were ‘foreseeable’ as these companies were overleveraged. They elaborated:
Solvency concerns around entities such as Celsius, Three Arrows Capital (3AC), Voyager and similar counterparts were due to insufficient risk control. Reports of other struggling firms are quickly becoming stories of restructuring, bankruptcy, and failure.
These issues were predictable and credit-specific. They weren’t crypto specific. These firms had high levels of debt and short-term liabilities that were not matched by longer-term illiquid assets.
3AC, Celsius, and Voyager’s Issues Were Reminiscent of Wall Street in the 90s and 2000s.
According to the Coinbase team, these companies got ‘caught up in the frenzy of a crypto bull market and forgot the basics of risk management.’ They went on to utilize unhedged bets, overinvest in the Terra ecosystem, and use ‘massive leverage.’ These activities were reminiscent of ‘Long Term Capital Management in the 1990s, Lehman Brothers in the 2000s, and even Archegos Capital Management in 2021.’
Coinbase Stress Tests Its Exposures Through Monte Carlos Simulations.
In regards to how Coinbase analyses and mitigates financial risks, the team stated that they do thorough due diligence with counterparties. It also carries out multiple stress tests of its exposures through Monte Carlo simulations to ‘several standard deviations.’
The Coinbase team highlighted these ways it manages risks.
- Continue to understand what goes wrong and identify potential failure points in products, trading, or counterparties.
- Anticipating internal weaknesses and failures of processes within the company.
- and Expecting external surprises by leaving room for Murphy’s law (Anything that can go wrong will go wrong.)