As U.S. stocks closed on June 27, Coinbase’s stock price was fixed at $55.96, down 10.76% during the session. In April last year, it landed on Nasdaq as the “first stock” of the crypto asset exchange, and the opening price at that time for $381. In just over a year, Coinbase shares have fallen 85.3%.
The shift from bulls to bears in the crypto asset market has undoubtedly affected Coinbase’s performance. According to its financial report, in the first quarter of this year, the company’s revenue was $1.17 billion, down 27% year-on-year, and it recorded a loss of $420 million, compared with a net profit of $771 million in the same period last year.
Turning from profit to loss, in addition to the decline in transaction fee income due to the bleak market, this is also related to the increase in Coinbase spending. In the first quarter of this year, the company’s operating expenses were as high as $1.72 billion, an increase of 9% year-on-year. During the period, Coinbase maintained a rapid staff expansion, recruiting a total of 1,218 new employees, bringing its total number of employees to nearly 5,000.
As the crypto asset market fell further in June, Coinbase finally realized the importance of “cost reduction and efficiency increase” and announced 18% layoffs to reduce costs.
In addition to the problem of high operating expenses, Coinbase is also facing the challenge of competition from the industry such as FTX and Binance. In May of this year, its spot trading volume was surpassed by FTX for the first time. In addition, Coinbase will also face cash flow pressure during the bear market because it does not have a derivatives trading business.
Goldman Sachs has downgraded Coinbase stock to “sell” from “neutral” a few days ago, and expects its second-half revenue to drop by about 73% year-on-year.
Coinbase shares fall 85.3% since listing
As the crypto asset market continues to decline, the industry’s “first stock” Coinbase no longer has the style it had when it was listed on Nasdaq last year, and has turned to be looked down upon by the outside world.
On June 27, investment bank Goldman Sachs downgraded Coinbase (COIN) to “sell” from “neutral” and lowered its price target on the stock to $45 from $70. Goldman Sachs said the downgrade was due to continued declines in crypto asset prices and a consequent decline in industry activity levels.
About two weeks ago, JPMorgan also downgraded Coinbase to “neutral” from “overweight” and lowered its price target to $68 from $171. The recent market downturn could have a “significant negative impact” on Coinbase’s revenue, as the company generates most of its revenue from trading, staking and custody of crypto assets, JPMorgan said in the report.
Coinbase, which landed on the Nasdaq on April 14 last year, opened at $381 per share, and its stock surged as high as $429.5 that day. After the listing, the company, which was profitable last year, experienced successive declines in performance and declining stock trends.
As U.S. stocks closed on June 27, Coinbase shares settled at $55.96, down 10.76% during the session. Its current share price is down 85.3% from the opening price at the beginning of its listing and 86.97% from its all-time high. In more than a year of listing, Coinbase has fallen from peak to trough.
Coinbase’s stock price has been falling
In the world of crypto assets, exchanges have always been a high profit ground. Even if a bear market comes, as long as there is trading activity in the market, the trading platform can maintain a relatively stable cash flow. But why is Coinbase’s stock price all the way down, with little to no rebound? What happened to this company that used to be a benchmark in the industry?
Judging from the 2022 first-quarter earnings report released by Coinbase in May this year, its first-quarter revenue was $1.17 billion, down 27% year-on-year, and did not meet Wall Street’s expectations of $1.48 billion. In the first quarter of this year, Coinbase recorded a loss of $420 million, compared with a net profit of $771 million in the same period last year.
The turn from profit to loss stemmed from a general decline in Coinbase’s various revenue-generating businesses and a significant increase in operating expenses.
According to its earnings data, Coinbase achieved net income of nearly $1.2 billion in the first quarter, of which $1 billion was in transaction revenue and $152 million in subscription and services revenue, a 56% decline from the fourth quarter of last year. Among them, Coinbase’s retail transaction revenue of crypto assets in the first quarter was $966 million, down 56% year-on-year; institutional transaction revenue was $47 million, down 48% from the fourth quarter of last year.
Judging from the financial report data, transaction fee income accounts for more than 80% of Coinbase’s total revenue, and the main reason behind the decline in its revenue is the sharp decline in transaction volume. In the first quarter of this year, Coinbase’s trading volume was $309 billion, down from $547 billion in the fourth quarter of last year, and a 43% decrease from the previous quarter. Monthly transacting users (MTU) were 9.2 million, also down from 11.4 million in the fourth quarter of last year.
In terms of expenses, Coinbase’s overall operating expenses in the first quarter were $1.72 billion, up 9% year-on-year, the first time the company’s total expenses exceeded revenue since the company’s public earnings report. Among them, Coinbase’s technology and development expenses in the first quarter were $571 million, an increase of 24% over the fourth quarter of last year. Selling and marketing expenses were $200 million, down 18% from the fourth quarter. General and administrative expenses were $414 million, up 39% from the fourth quarter. Other operating expenses were $259 million, up 252% year over year.
Although Coinbase’s revenue decreased in the first quarter due to the downturn in the crypto asset market, it still had nearly $1.2 billion in revenue. Judging from its financial report, the reason for Coinbase’s loss may be due to excessive spending, especially after the crypto market entered a down cycle, Coinbase has maintained a high-speed personnel expansion.
The company added 1,218 employees in the first quarter, bringing its headcount to nearly 5,000, the earnings report showed. In May, Coinbase Chief Operating Officer Emilie Choi also said in an internal letter that the company plans to triple the number of employees.
Layoffs and throttling are difficult to cope with the bear market winter
However, after entering June, the crypto asset market ushered in a more substantial decline. As of June 28, BTC has fallen from $32,000 at the beginning of the month to $21,000, a drop of more than 34% within the month.
Coinbase’s revenue was further affected amid the sluggish market environment. Coinbase traded less than $80 billion in May, compared with its average of around $110 billion over the past 12 months, according to CryptoCompare data. Earlier, Coinbase said in a letter to shareholders that it expected the number of platform users and transaction volume to decline again in the second quarter.
With the market declining and revenue expectations falling, Coinbase finally realized the seriousness of the problem. In late May, Coinbase stopped the pace of recruitment and even rejected some new employees who should have joined. This month, the exchange officially launched its layoff plan.
On June 14, Coinbase said in an email that it would cut 18% of its workforce. Based on the company’s roughly 5,000 full-time employees, 900 will lose their jobs. The company’s founder, Brian Armstrong, said Coinbase needs to downsize as the economy may enter a recession and the company grows too fast during a bull market.
Coinbase announces 18% layoffs
Such layoffs are still considered low by Goldman Sachs, which believes that Coinbase may need further layoffs to maintain a relatively healthy financial position. Goldman noted that as retail trading activity slows, Coinbase will need to slash its cost base to stem the resulting cash burn, “which could negatively impact talent retention, however.”
With lower revenue expectations, layoffs and throttling are Coinbase’s obligatory tactics. But in fact, throttling is only a way to ease cash flow, open source revenue generation is the key to breaking through the bottleneck, and at this point, it has always been at a disadvantage compared to its competitors.
Coinbase is a compliant trading platform in the United States, but in the crypto asset market, FTX and Binance also occupy major market shares. According to The Block data, in May this year, the spot trading volume of crypto asset exchanges was 830.4 billion US dollars, of which Binance accounted for 64.1%, while FTX surpassed Coinbase for the first time and ranked second, accounting for 10.8%. In contrast, Coinbase’s market share has been compressed to 9.6%. According to JPMorgan analysis, it is expected that in June, the spot trading volume of FTX will continue to be higher than that of Coinbase.
Although Coinbase has launched many new assets on the site in the past year, its total assets are still insufficient compared to Binance and FTX, which has led to the loss of some users. A more serious problem is that because Coinbase operates under a strict regulatory framework, it has not yet opened a derivatives trading business, which makes its product richness lag behind its competitors and lack of revenue capacity.
Compared with the spot trading business, the revenue-generating capacity of derivatives business such as contract trading is stronger. Taking Binance as an example, the trading volume of its derivatives far exceeds its spot trading volume. Data on June 26 shows that the contract trading volume of the Biannce BTC/USDT trading pair is about 8 times that of the spot trading volume.
Analysts believe that in a bear market cycle, the trading volume of crypto assets is often relatively sluggish, while derivatives trading is relatively limited because it can be sold short. “If there is no derivatives business, and only relying on spot income to generate income, the cash flow pressure of the trading platform in the bear market will be great.”
As the Federal Reserve continues to tighten monetary easing policies, there are still further downside risks to the crypto asset market. In the long bear market, Coinbase has entered a cold winter. Goldman Sachs is still not optimistic about the performance of the exchange in the second half of the year.