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There are many examples, but few more stark or telling than Coinbase, which went public in April 2021, when the fintech market and the price of Bitcoin were still in fizzy-cork-popping mode. In fact, you could say that not much has changed about Coinbase in the sixteen months since. except the global market and the price of Bitcoin. When the price of Bitcoin drops, fewer people open and use Coinbase accounts, and therefore Coinbase makes less money. Coinbase stock and the price of Bitcoin follow closely until the spring, when Coinbase began to fall a bit harder than Bitcoin:
Coinbase’s overall downfall was entirely predictable; indeed, we predicted it even before Coinbase went public. In a subscribers-only episode on March 1, 2021, we interviewed Jeff John Roberts, reporter for FORTUNE and Decrypt and author of Kings of Cryptoan insightful history of Coinbase.
“I think it’s going to be a reality check, because a lot of crypto people like to live in this fantasy world of ‘we’re beyond the state’ and stuff like that. So I think having to filing those quarterly reports will change them,” Roberts said. “When they shit the bed — which they will sooner or later. interesting when another crypto winter comes, and it will; I tried to think of another such cyclical business, so how will the public market react when it sees the only revenue base drop by 70%?”
This question was answered this summer when the crypto winter hit hard. When Coinbase reported earnings on Aug. 9, revenue fell nearly 64% and the company lost $4.98 per share, nearly double the amount analysts estimated. The value of the cryptocurrency held by Coinbase, at $428 million, is half what it was just three months earlier.
That was the predictable part. Less predictable has been how CEO Brian Armstrong and his executives performed as the market rose and fell. Massive hiring in 2021 as the company expands would come back to haunt her. Coinbase, which dominates the US crypto trading market, also embarked on an ambitious international campaign, promising to “double regional investments, adding platforms such as CoinSwitch Kuber and CoinDCX in India, Bitso in Latin America to our portfolio. and Rain in the Middle East.” And it spent a lot of time and resources on a non-fungible token (NFT) market – including a bizarre Hollywood movie project – that was widely rejected by the market.
Then everything fell apart. On June 14, Armstrong announced 1,110 layoffs, or 18% of the workforce, acknowledging that “we grew too fast.” An online petition demanding the resignation of senior officials seemed to really get under Armstrong’s skin. In a Twitter storm he taunted the writers of the petition: “If you don’t trust the leaders or the CEO of a company, why are you working in this company? Quit and find a company you believe in!
The Securities and Exchange Commission (SEC) piled on in July, in conjunction with an insider trading case involving a former Coinbase employee. According to a civil complaint from the SEC, at least nine coins traded on the Coinbase platform are considered securities, even though Coinbase has never registered with the SEC. Since then, Barron’s has reported another SEC investigation into Coinbase’s staking program.
Perhaps most worrying of all for its shareholders, Coinbase is losing market share. Citing data from CryptoCompare, Bloomberg reported this week that “Coinbase’s market share fell to 6.3% in July from 10.7% in January, as measured by global spot trading volume among the 15 major crypto exchanges”. Unsurprisingly, FTX, which has swallowed up crypto companies as they stumble, is picking up the slack, as is Binance, which despite all its regulatory headaches remains the largest crypto exchange in the world.
And yet, for all that, Coinbase stock has recovered considerably from its low point this year ($53.72 per share on May 11); On Friday, COIN closed at over $90 per share. Perhaps the market thinks Bitcoin’s modest turnaround since mid-June bodes well for COIN stocks, and certainly a recent announcement that BlackRock will use Coinbase to provide its institutional clients with access to Bitcoin trading has been considered a stock booster.
But beware: Coinbase’s descent has generated outsized interest from short sellers. Somewhere around a fifth of all COIN shares are now sold short. As a result, Barron’s reports that Coinbase stocks “act like meme stocks.”
Where is this all going? We turned to Roberts again, not for day-to-day stock advice, but to get a general idea of where Coinbase is headed. One factor to watch: In May, FTX’s Sam Bankman-Fried bought 56 million shares of Robinhood. This is part of a larger effort to weed out dying crypto assets, as we discussed here. If, as has been suggested, FTX ends up owning Robinhood, it could change everything for Coinbase. Roberts says, “It represents a large number of customer accounts and brings [FTX’s] technical magic to it. For customer acquisition costs, it’s a very cheap way to do it and if they pull out all the stops with marketing and their great technology, it could be a game-changer for Coinbase.