Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk to our f inancial statements associated with the effect of changes in market factors, including risks associated with interest rates, foreign currency, derivatives, equity investments, and crypto assets. These assets, liabilities, and equities are held for purposes other than trading.
Interest Rate Risk
Our exposure to changes in interest rates primarily relates to interest earned on our cash and cash equivalents and customer custodial funds and from our arrangement with Circle Internet Financial (“Circle”).
Our investment policy and strategy related to our cash and cash equivalents and customer custodial funds is to preserve capital and meet liquidity requirements without increasing risk. These funds consist of cash deposits and money market funds, and therefore the fair value of our cash and cash equivalents and customer custodial funds would not be significantly affected by either an increase or a decrease in interest rates. However, the amount of interest we earn on these balances, especially the cash equivalents, may be significantly impacted. The Federal Reserve has adjusted the Federal Funds Rate significantly in recent years in an effort to co ntrol inflation, raising it from a low of under 0.1% as of March 2022 to a peak of 5.33% from July 2023 to September 2024, followed by declines to arrive at 4.33% a s of December 31, 2024. This activity reflects an increase of over 500 basis points, followed by a decrease of nearly 100 basis points, and as a result, we believe additional significant changes in interest rates are reasonably possible. The gross increase between December 31, 2022 and December 31, 2024, a period which we currently deem to be a reasonable proxy for near term future changes in interest rates, was approximately 200 basis points. A hypothetical 200 basis points increase or decrease in average interest rates applied to our average month end cash equivalents balances for the years ended December 31, 2024 and 2023 , would have resulted in an impact of $165.8 million and $122.9 million, r espectively, on interest earned on these funds.
We also earn stablecoin revenue from an arrangement with Circle. Interest income is earned by Circle on USDC reserve balances held. Circle reported that, as of December 31, 2024, underlying reserves were held in cash within segregated accounts titled for the benefit of USDC holders and a government money market fund that held cash, short-duration U.S. Treasuries, and overnight U.S. Treasury repurchase agreements, and therefore the fair value of these balances would not be significantly affected by either an increase or a decrease in interest rates. However, the related amount of stablecoin revenue we earn may be significantly impacted. A hypothetical 200 basis points increase or decrease in average interest rates applied to daily USDC reserve balances held by Circle for the years ended December 31, 2024 and 2023, would have resulted in an impact of $387.8 million and $294.2 million, respectively, on stablecoin revenue .
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Foreign Currency Risk
Foreign currency transaction risk
Revenues, expenses, and financial results of our foreign subsidiaries are recorded in the functional currency of these subsidiaries. Our foreign currency exposure is primarily related to transactions denominated in Euros and British Pounds attributable to cash and cash equivalents, customer custodial funds and customer custodial fund liabilities, and intercompany transactions where the transaction currency is different from a subsidiary’s functional currency. Changes in foreign exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect our results of operations as expressed in U.S. dollars. We have experienced and will continue to experience fluctuations in our results of operations and cash flows as a result of changes in foreign currency exchange rates, including from gains or losses on the settlement and the remeasurement of monetary assets and liabilities denominated in foreign currencies that are not the functional currency of the respective entity. From time to time, we may enter into derivatives or other financial instruments in an attempt to hedge our exposure to foreign currency exchange risk. No such instruments were outstanding as of December 31, 2024 and 2023 or during the year ended December 31, 2024.
See Note 16. Other (Income) Expense, Net of the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for losses on foreign exchange, net for the years ended December 31, 2024 and 2023. If an adverse 10% foreign currency exchange rate change was applied to the largest foreign currency exposure (e.g. Euro) or to all foreign currency exposures in aggregate, of monetary assets, liabilities, and commitments denominated in currencies other than its functional currency as of December 31, 2024 and 2023, it would not have a material impact on our financial results. Our international operations expose us to exchange rate fluctuations otherwise. Such fluctuations could have a material impact on our future results of operations and cash flows, the impact of which is difficult to predict as it depends on many factors that we cannot forecast with reliable accuracy, including the volume and nature of our transactions and the particular currencies in which these transactions are denominated.
Foreign currency translation risk
Fluctuations in functional currencies from our net investment in international subsidiaries expose us to foreign currency translation risk, where changes in foreign currency exchange rates may adversely affect our results of operations upon translation into U.S. dollars. S ee our Consolidated Statements of Comprehensive income (loss) in Part II, Item 8 of this Annual Report on Form 10-K for translation adjustments for the years ended December 31, 2024, 2023, and 2022. As of December 31, 2024 and 2023, a 10% increase or decrease in foreign currency exchange rates used in translating the financial statements of subsidiaries with functional currencies other than our reporting currency would not have a material impact on our financial results.
Equity Investment Risk
We hold strategic investments in privately held companies in the form of equity securities without readily determinable fair values in which we do not have a controlling interest or significant influence. These investments are subject to a wide variety of market and price-related risks due to the lack of readily available market data, which requires us to make significant estimates and assumptions that could substantially impact the carrying value of the investments. We perform a qualitative assessment of our portfolio of strategic equity investments on a quarterly basis for indicators of impairment. Our analysis includes a review of indicators such as: operating results when available; business prospects of the investees; changes in the regulatory and macroeconomic environment; observable price changes in similar transactions; and general market conditions of the geographical area or industry in which our investees operate. If indicators of impairment exist and the estimated fair value of an investment is below the carrying amount, we will write down the investment to fair value.
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As of December 31, 2024 and 2023 , our strategic equity investments in privately held companies were $374.2 million and $343.0 million, respectively. Adjustments to the fair value of our investments are recorded in Other (income) expense, net in our Consolidated Statements of Operations. During the years ended December 31, 2024 and 2023 , we recognized immaterial impairment expense related to our strategic investments in privately held companies. We anticipate volatility to our net income (loss) in future periods due to changes in the fair values associated with these investments and observable price changes in similar transactions that could impact our fair value assessments. Based on future market conditions, these changes could be material to our financial results. For more information, see Notes 2. Summary of Significant Accounting Policies — Investments and 13. Fair Value Measurements of the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K .
Market Risk of Crypto Assets
We generate a large portion of our total revenue from transaction fees on our platform in connection with the purchase, sale, and trading of crypto assets by our customers. Transaction revenue is based on transaction fees that are either a flat fee or a percentage of the value of each transaction and may vary depending on payment type and the value of the transaction. We also generate a large portion of our total revenue from our subscription products and services, and such revenue has grown over time. Accordingly, crypto asset price risk could adversely affect our operating results. In particular, our future profitability may depend upon the market price of Bitcoin, Ethereum, and Solana, as well as other crypto assets. Crypto asset prices, along with our operating results, have fluctuated significantly from quarter to quarter. There is no assurance that crypto asset prices will reflect historical trends. A decline in the market price of Bitcoin, Ethereum, Solana, and other crypto assets has in the past had and could in the future have an adverse effect on our earnings and our future cash flows. This may also affect our liquidity and ability to meet ongoing obligations.
In addition to the exposures described above, we hold crypto assets for various reasons. As of December 31, 2024 , we held the following crypto assets: $1.6 billion held for investment; $261.1 million that were borrowed; $82.8 million held for operations; and $767.5 million held as collateral. In addition, as of December 31, 2024, customers had pledged $178.6 million of crypto assets that are not recognized as collateral. See Note 2. Summary of Significant Accounting Policies of the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion of these different categories of assets.
Beginning on January 1, 2024, as a result of our adoption of ASU 2023-08, we changed how we value and present crypto assets held in our Consolidated Balance Sheets and thus there are no comparable figures reported in our Consolidated Balance Sheets as of December 31, 2023. However, prior to adoption, we classified our crypto assets held according to these same categories and have utilized these balances in preparing the following disclosures.
Crypto assets held for investment are primarily held long term, and historically, we have not attempted to reduce our market risk exposure associated with these crypto assets. Crypto asset prices have been volatile, as demonstrated by the one year historical volatility of Bitcoin and Ethereum of approximately 50% implied from the annualized standard deviation of daily price returns observed in the past 24 months. A hypothetical 50% increase or decrease in crypto assets prices as of December 31, 2024 and 2023 would result in a $776.5 million and $514.0 million impact, respectively, to the value of our Crypto assets held for investment and would have, under ASU 2023-08, been recorded as a gain or loss in our Consolidated Statements of Operations.
Our market risk exposure on all remaining categories of crypto assets that we hold is limited, either due to their short-term nature or to naturally offsetting positions. Crypto assets held for operations are received as a form of payment and are converted to cash or used to fulfill expenses, primarily blockchain rewards, nearly immediately, and therefore are subject to limited market risk. A hypothetical 10% increase or decrease in crypto asset prices applied to the value of our Crypto assets held for operations as of December 31, 2024 and 2023, and applied to the simple average of our gross inflows and outflows of
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these assets for their weighted average period outstanding during 2024, would not have a material impact on our Consolidated Financial Statements. Our market risk exposure on Crypt o assets borrowed and Crypto assets held as collateral is limited through naturally offsetting positions o f the crypto asset borrowings and obligation to return crypto asset collateral which contain embedded derivatives that are remeasured each reporting period. See — Borrowings and related collateral derivative positions below. Similarly, we do not have market risk exposure on crypto assets received but not recognized as collateral as we are obligated to return that collateral.
Market Risk of Derivatives
We have exposure to derivatives measured and recorded at fair value. Market risk on derivatives is the exposure created by potential fluctuations in market prices and other factors and is a function of the type of derivative product, the volume of transactions, the tenor and terms of the agreement, and the underlying volatility.
Strategic derivative positions
In certain market conditions, we may opportunistically employ derivative strategies within a disciplined risk management framework to attempt to hedge our exposure to foreign currency or crypto assets held for investment. We did not have any such positions as of December 31, 2024 or 2023.
Our remaining derivative positions, including all of those held during the periods presented, arise from our operations and reflect a strategy of largely mitigating these remaining exposures through naturally offsetting positions, regardless of whether hedge accounting is achieved. See below for a discussion of these derivatives.
Borrowings and related collateral derivative positions
Our market risk exposure on derivative crypto asset borrowings and obligations to return crypto asset collateral (when combined with their host contracts, “Gross Financing Derivatives”) is naturally offset, at least in part, by the associated non-derivative crypto assets borrowed, crypto assets held as collateral, and crypto asset loan receivables originated with borrowed assets, all of which are recorded and held at fair value. The following table summarizes our Gross Financing Derivatives and net exposures after considering the naturally offsetting non-derivative positions, related to our crypto asset borrowings and associated collateral (“Net Financing Positions”) (in thousands):
December 31,
2024 2023
Gross Financing Derivatives
$ 1,067,594 $ 416,988
Net Financing Positions
$ — $ 73
The following table presents the impact of changes in fair value of the derivatives noted above when considered gross and net of the naturally offsetting non-derivative positions in our Consolidated Statements of Operations (in thousands):
Year Ended December 31,
2024 2023
Losses on Gross Financing Derivatives (1)
$ (114,521) $ (103,338)
Losses on Net Financing Positions (2)
$ — $ (5,016)
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(1) Gains and losses on derivatives are recorded in our Consolidated Statements of Operations in the locations shown in Note 11. Derivatives of the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
(2) As of January 1, 2024, the date of our adoption of ASU 2023-08, net gains and losses after considering the associated naturally offsetting non-derivative positions are recorded in Transaction expense in the Consolidated Statements of Operations. Prior to adoption of ASU 2023-08, net gains and losses after considering the naturally offsetting non-derivative positions were recorded in Other operating expense, net in the Consolidated Statements of Operations.
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As of December 31, 2024 and 2023, a hypothetical 50% increase or decrease in the fair value of these derivative positions, after considering the associated naturally offsetting positions, would not have a material impact on our Consolidated Financial Statements. This hypothetical 50% is calculated as discussed above under Market Risk of Crypto Assets , as the fair value of these derivatives is also derived primarily from the volatility of Bitcoin and Ethereum over a similar period.
Other derivative positions
Our market risk exposure to derivatives arising from accounts receivable and payable denominated in crypto assets (when combined with their host contracts, “Other Derivatives”) represents unmitigated exposure. However, these assets and liabilities are short-term in nature. The following table summarizes these Other Derivatives exposures, on a gross basis, as the receivables and payables may be unrelated (in thousands):
December 31,
2024 2023
Gross Other Derivatives
$ 228,712 $ 65,082
The following table presents the impact of changes in fair value of the derivatives noted above in our Consolidated Statements of Operations (in thousands):
Year Ended December 31,
2024 2023
Gains on Gross Other Derivatives (1)
$ 83,269 $ 37,031
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(1) Gains and losses on derivatives are recorded in our Consolidated Statements of Operations in the locations shown in Note 11. Derivatives of the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
As of December 31, 2024 and 2023, a hypothetical 10% increase or decrease in the fair value of these Other Derivatives positions would not have a material impact on our Consolidated Financial Statements.
For more information on our derivatives, see Notes 2. Summary of Significant Accounting Policies — Derivative contracts , 4. Collateralized Arrangements and Financing , 6. Accounts Receivable, Net, 11. Derivatives, and 12. Other Consolidated Balance Sheets Details of the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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