Coinbase CEO Brian Armstrong (Coinbase)
The only publicly traded cryptocurrency exchange in the United States, Coinbase, has revealed a strategy to seize the current surge in digital assets by pulling in $1 billion through the sale of convertible bonds. This move circumvents a potential equity sale which could potentially damage its stock price. The plan aligns with the recent approach taken by MicroStrategy, under the supervision of Michael Saylor, to fund its crypto endeavors.
Coinbase stated on Tuesday that it intends to propose unsecured convertible senior notes through private offering. These convertible bonds have the potential, at a specific time, to be converted into shares of the issuing corporation, or cash. The earmarked conversion year for the notes Coinbase aims to offer is 2030. If the company had decided to source funding through sale of new Coinbase shares, it would have diluted the ownership interest of existing shareholders – a move potentially seen by investors in negative light.
Exploring the debt market to fund its crypto business, Coinbase is mimicking a strategy that has served MicroStrategy well over the last few years. Under the charge of Saylor, MicroStrategy has acquired 205,000 bitcoin, currently having an approximate value of nearly $15 billion. A large part of this acquisition has been funded by the sales of over $2 billion of convertible notes by MicroStrategy. Just this month, MicroStrategy sold convertible notes worth $700 million. The demand was strong enough to allow the company to sell more than the originally anticipated $600 million.
Coinbase is implementing an additional measure to minimize the dilution when its debt is converted into equity via the introduction of “negotiated capped call transactions”. This acts as a safeguard against dilution when the conversion of notes takes place, which was not a feature in MicroStrategy’s latest transaction.
Issuers apply these hedge mechanisms in convertible debt to avoid dilution to existing shareholders, even when their share price increases beyond the conversion price. However, a fee is required. Renowned fitness corporation, Peloton, made notable headlines when it successfully raised
$1 billion in 2021 through convertible debts, inclusive of a capped call option. “The capped call transactions will address, given standard adjustments, the number of Coinbase’s Class A common stock shares which will initially underlie the notes”, stated Coinbase.
This strategy follows a significant surge in the value of bitcoin, driving the price of the digital asset to a record
above $73,000. Bitcoin has increased by 67% this year, whereas Coinbase’s stock has risen by 48% within the same timeframe. It is common for publicly traded companies to leverage bull markets to raise funds by issuing new securities such as equity, convertible notes, etc.
Coinbase indicated that it might use the funds from this transaction to repay debt, cover potential capped call transactions, and even potentially acquire other businesses.
Coinbase’s $1 billion offering comes after some Wall Street analysts ditched their bearish stance on the stock. Raymond James and Goldman Sachs are bears that have upgraded the stock, citing the massive rally in the digital asset markets.
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