Coinbase faces tough times in bear market

As the U.S. stock market closed on June 27, Coinbase's stock price was fixed at $55.96, down 10.76% during the session. In April last year, it was listed on the Nasdaq as the "first stock" of a crypto asset exchange, with an opening price of $381. In just over a year, Coinbase's stock price has fallen by 85.3%.

The crypto asset market's turn from bull to bear has undoubtedly affected Coinbase's performance. According to its published financial report, the company's revenue in the first quarter of this year was US$1.17 billion, a year-on-year decline of 27%, and a loss of US$420 million. In comparison, its net profit in the same period last year was US$771 million.

The change from profit to loss was not only due to the decline in transaction fee income caused by the bleak market, but also related to the increase in Coinbase's expenses. In the first quarter of this year, the company's operating expenses reached 1.72 billion US dollars, a year-on-year increase of 9%. During this period, Coinbase maintained a high-speed personnel 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 "reducing costs and increasing efficiency" and announced a 18% layoff to cut costs.

In addition to the problem of excessive operating expenses, Coinbase also faces the challenge of competition from peers such as FTX and Binance. In May this year, its spot trading volume was surpassed by FTX for the first time. In addition, due to the lack of derivatives trading business, Coinbase will also face cash flow pressure during the bear market.

Recently, Goldman Sachs downgraded Coinbase's stock rating from "neutral" to "sell" and expected its revenue in the second half of the year to drop by about 73% year-on-year.

Coinbase's stock price has fallen 85.3% since its IPO

As the cryptocurrency market continues to decline, the industry's "first stock" Coinbase has lost the momentum it had when it was listed on the Nasdaq last year, and has begun to be viewed negatively by the outside world.

On June 27, investment bank Goldman Sachs downgraded Coinbase (COIN) from “neutral” to “sell” and lowered its stock price target from $70 to $45. Goldman Sachs said the downgrade was due to the continued decline in crypto asset prices and the subsequent decline in industry activity levels.

About two weeks ago, JPMorgan also downgraded Coinbase's stock rating from "overweight" to "neutral" and lowered its target price from $171 to $68. JPMorgan noted in the report that since the company derives most of its revenue from crypto asset trading, staking and custody, the recent market downturn could have a "significant negative impact" on Coinbase's revenue.

Coinbase was listed on the Nasdaq on April 14 last year, with an opening price of $381 per share. Its stock price once soared to $429.5 on the same day. After going public, the company, which made a lot of money last year, has seen its performance decline and its stock price retreat.

As the U.S. stock market closed on June 27, Coinbase's stock price was fixed at $55.96, down 10.76% during the day. Its current stock price is 85.3% lower than its opening price at the beginning of its listing, and 86.97% lower than its historical high. In more than a year since its listing, Coinbase has fallen from its peak to its lowest point.

Coinbase stock price continues to fall

In the world of crypto assets, exchanges have always been a place of high profits. Even in a bear market , as long as there are trading activities in the market, trading platforms can maintain a relatively stable cash flow. But why has Coinbase's stock price been falling all the way and has hardly rebounded? What happened to this company that once established itself as a benchmark in the industry?

According to the first quarter 2022 financial report released by Coinbase in May this year, its revenue in the first quarter was US$1.17 billion, a year-on-year decline of 27%, which did not meet Wall Street's expectations of US$1.48 billion. In the first quarter of this year, Coinbase recorded a loss of US$420 million, while in the same period last year Coinbase achieved a net profit of US$771 million.

The turnaround from profit to loss was due to a general decline in Coinbase's revenue-generating businesses and a significant increase in operating expenses.

According to its financial report, Coinbase achieved nearly $1.2 billion in net income in the first quarter, of which $1 billion was trading income and $152 million was subscription and service income, a 56% decrease from the fourth quarter of last year. Among them, Coinbase's retail trading revenue for crypto assets in the first quarter was $966 million, a year-on-year decrease of 56%; institutional trading revenue was $47 million, a 48% decrease from the fourth quarter of last year.

According to the financial report data, transaction fee income accounts for more than 80% of Coinbase's total revenue. The main reason behind the decline in revenue is the sharp decline in trading volume. In the first quarter of this year, Coinbase's trading volume was US$309 billion, lower than the US$547 billion in the fourth quarter of last year, a month-on-month decrease of 43%. The number of monthly trading users (MTU) was 9.2 million, which was also a decrease from 11.4 million in the fourth quarter of last year.

In terms of expenditure, Coinbase's overall operating expenses in the first quarter were $1.72 billion, a year-on-year increase of 9%. This is the first time that the company's total expenses have exceeded revenue since its public financial report. Among them, Coinbase's technology and development expenses in the first quarter were $571 million, an increase of 24% from the fourth quarter of last year. Sales and marketing expenses were $200 million, a decrease of 18% from the fourth quarter. General and administrative expenses were $414 million, an increase of 39% from the fourth quarter. Other operating expenses were $259 million, a year-on-year increase of 252%.

Although Coinbase's revenue in the first quarter decreased 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 losses may be attributed to excessive spending, especially after the crypto market entered a downward cycle, Coinbase still maintained a high-speed staff expansion.

The financial report shows that the company added 1,218 employees in the first quarter, bringing its total number of employees to nearly 5,000. In May of this year, Coinbase's Chief Operating Officer Emilie Choi also stated in an internal letter that the company plans to triple its number of employees.

Layoffs and cost-cutting are not enough to cope with the bear market winter

However, after entering June, the crypto asset market experienced a more significant decline. As of June 28, BTC had fallen from $32,000 at the beginning of the month to $21,000, a monthly drop of more than 34%.

In the context of a sluggish market environment, Coinbase's revenue was further affected. According to CryptoCompare data, Coinbase's trading volume in May this year was less than $80 billion, while its average trading volume in the past 12 months was around $110 billion. Previously, Coinbase stated in a letter to shareholders that it expects the number of platform users and trading volume to decline again in the second fiscal quarter.

With the market downturn and falling revenue expectations, Coinbase finally realized the seriousness of the problem. In late May, Coinbase stopped recruiting and even rejected some new employees who were supposed to join. This month, the exchange officially launched a layoff plan.

On June 14, Coinbase announced in an email that it would lay off 18% of its employees. Based on the company's approximately 5,000 full-time employees, 900 employees will lose their jobs. Brian Armstrong, the company's founder, said that because the economy may enter a recession and the company grew too fast during the bull market, "reducing costs and increasing efficiency" is very important in low-density markets, so Coinbase needs to scale down.

Coinbase announces 18% layoffs

Goldman Sachs still thinks this layoff rate is too low, and the agency believes that Coinbase may need to further layoffs to maintain a relatively healthy financial situation. Goldman Sachs pointed out that as retail trading activities slow down, Coinbase will need to significantly cut its cost base to stop the resulting cash consumption, "however, this may have a negative impact on talent retention."

With lower revenue expectations, Coinbase has no choice but to lay off employees and cut costs. But in fact, cutting costs is only a way to ease cash flow, and opening up new sources of income is the key to breaking through the bottleneck. In this regard, 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 a major market share. According to data from The Block, in May this year, the spot trading volume of crypto asset exchanges was US$830.4 billion, of which Binance accounted for 64.1%, and 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%. JPMorgan Chase analysis said that it is expected that in June, FTX's spot trading volume will continue to be higher than Coinbase.

Although Coinbase has launched many new assets on the site in the past year, its total number of assets is still insufficient compared to Binance and FTX, which has led to the loss of some users. The more serious problem is that because Coinbase operates strictly under the regulatory framework, it has not yet opened a derivatives trading business, which makes its product richness lag behind its competitors and lacks revenue capacity.

Compared with spot trading , derivatives such as contract trading have stronger revenue-generating capabilities. Take Binance as an example, its derivatives trading volume far exceeds its spot trading volume. Data on June 26 showed that the contract trading volume of Binance BTC/USDT trading pair was about 8 times the spot trading volume.

Analysts believe that in a bear market cycle, the trading volume of crypto asset spot is often relatively sluggish, while derivatives trading is relatively less affected because it can be shorted. "If there is no derivatives business and only spot revenue is generated, the cash flow pressure of the trading platform in a bear market will be very large."

As the Federal Reserve continues to tighten its monetary easing policy, the crypto asset market still faces further downside risks. In the long bear market, Coinbase has entered a cold winter. Goldman Sachs is still not optimistic about the exchange's performance in the second half of the year, "expecting its revenue in the second half of the year to drop by about 73% year-on-year, and its full-year revenue to drop by about 61%."