Coinbase (NASDAQ: COIN) is cutting another 20% of its workforce amid a protracted digital asset downturn, according to a new dispatch from CEO Brian Armstrong.
The cuts amount to 950 people, on top of the 1,100 they cut back in June (“in hindsight, we could have cut further at the time,” writes Armstrong). Armstrong says the layoffs are part of a plan to cut operating expenses by 25%, a plan which also involves shuttering several of Coinbase’s riskier projects. According to the post, affected employees had already had their system access removed by the time the announcement went live.
Coinbase’s share price, which has been in a steep decline more or less since it first went public at over $300, experienced a modest boost following the news. In what is perhaps a sign that investors are anxious for more restraint as ‘crypto’ chaos continues, $COIN closed at $43.23, up almost 13% on the day.
Armstrong’s post is addressed to Coinbase staff, but its overall purpose appears to be to set the narrative ahead of a slightly more revealing 8-K form filed with the U.S. Securities and Exchange Commission (SEC), which went public shortly after the announcement. In it, Coinbase states that it expects its 2022 losses could be as high as $500 million. The layoffs are part of a broader restructuring effort designed to curb operating expenses by 25% before the end of Q1 2023. Coinbase estimates that the restructure itself will cost the company between $149 million and $163 million.
Much of the language used by Armstrong in the most recent announcement is taken verbatim from his announcement the last time they had to slash headcount: Armstrong says that as CEO, the “buck stops with [him]” that he’d like to explain “how we got here,” and then does very little explaining at all. Coinbase apparently breaks its forecasts into three scenarios: bull, base and bear—a seemingly imprecise method which would explain how the company managed to rubberband from increasing headcount by almost 2,500 in an absurd bull market in 2021, to slashing it by over 1,000 in June 2022 and now another 950 in January 2023. As far as explanations go, this seems to speak for itself.
There’s also a half-hearted attempt to hitch Coinbase’s issues to a downturn in the “broader macroeconomy,” though he does acknowledge the “fallout from unscrupulous actors in the industry” and the potential for further contagion, an obvious reference to the FTX disaster. Despite these apparently dire circumstances, Armstrong’s post contains plenty of bluster. “Progress doesn’t always happen in a straight line,” he writes, “and sometimes it can feel like we’re taking two steps forward and one step back. But just like we saw with the internet, the most important companies not only survive but thrive during down markets by being rigorous with cost management, and continuing to build innovative products.”
There’s also a priceless attempt to put a positive spin on the drastic workforce reduction, reminding everyone of Coinbase’s start-up origins and imploring everyone to “remember what it feels like to have small, nimble teams that are able to get more done.”
Coinbase insiders have done nothing but sell since the company’s 2021 direct listing
However, this positivity is somewhat undermined by massive insider selling by the Coinbase C-Suite since the company was listed on the NASDAQ in early 2021: according to public filings, insiders have sold over $5.8 billion worth of stock across 744 transactions, compared with a paltry $85 million worth of buys across 31 transactions.
Armstrong himself has sold almost $300 million worth of Coinbase stock, while CFO Alesia Haas has sold roughly $111 million. The two collectively sold $8 million worth of stock in the 30 days leading up to the latest announcement alone. Neither disclosed any purchases.
Two individuals account for the entirety of insider buying which has taken place since 2021: Coinbase board member and Shopify CEO Tobias Lutke, and co-founder Fred Ehrsam. Lutke is only recorded as making $8.2 million worth of purchases, while Ehrsam’s sale of nearly half a billion dollars’ worth of stock vastly outstrips the roughly $76 million he’s purchased since the company’s direct listing. The entirety of those purchases took place in May 2022, after $COIN slid almost 50% on the previous month and 85% from the all time highs of 2021.
Speaking of insiders, Coinbase also happens to be at the centre of the digital asset industry’s first ever insider trading case. Ishan Wahi, a former Coinbase project manager, along with a brother and a friend, are being prosecuted by the U.S. Department of Justice after the manager apparently leaked impending coin listings which the other two would then trade in anticipation of the official announcements. The defendants allegedly made 40 trades of the back of information shared by the Coinbase manager. The brother was just sentenced to 10 months imprisonment: the friend is on the run.
I’m in danger
It would be one thing if all that is at risk was Coinbase and the cash cow it has become for Armstrong and other insiders (though judging by the insider selling, they’re going to make out alright regardless). But if 2022 has shown us anything, it’s that the industry is deeply, fatally connected. Coinbase, for better or worse, has become a nexus for the industry in more ways than one: according to data collated by WuBlockchain, Coinbase led all venture capitalists in digital asset investments in 2022, funding 119 projects.
That Coinbase was able to come out so far ahead in a year of drastic headcount reductions is notable, but as the collapses of FTX and 3AC show, these institutions are remarkably good at projecting success well after they’ve past the financial point of no return behind closed doors.
It should also be remembered that most of Coinbase’s revenue comes from the trading fees it collects from those using the platform. For Coinbase, it’s imperative that the digital asset casino keeps ushering in new investors. Which means keeping up the appearance of a thriving digital asset economy is paramount to Coinbase.
The latest announcement from Armstrong will do little to further that aim.
Neither will the pending litigation Coinbase currently faces which, if successful, could feasibly bring down the house of cards for good. Coinbase, along with Kraken, are being accused of using the Bitcoin name to ‘pass-off’ unrelated coins as the real thing. The point is simple: Bitcoin was very clearly spelled out by Satoshi Nakamoto in the white paper, yet many unrelated projects, such as BTC, are using the Bitcoin name to sell to investors who don’t know better. Most of Coinbase’s trading volume comes from BTC and its analogues, so if those products are no longer able to be legally sold, a huge portion of their revenue goes up in smoke. Even if such products are allowed to be kept on the platform by the grace of Bitcoin’s original inventor, the damages Coinbase is likely to have to pay for years of fraudulent passing off are likely to be gargantuan: according to the suit, the claim is worth hundreds of billions of pounds.
These concerns are especially pressing new and existing Coinbase customers, because another of Coinbase’s first-quarter earnings report from 2022 included the rather alarming nugget of information that “custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”
At the time, Armstrong tweeted that “this disclosure makes sense in that these legal protections have not been tested in court for crypto assets specifically, and it is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings.”
However, as digital asset companies began to unravel over the course of 2022, it became obvious that customers were right to worry. Last week, a bankruptcy judge ruled that the $4.2 billion worth of customer assets held by failed crypto lender Celsius belonged to Celsius and thus were subject to the bankruptcy proceedings.
Do choppier waters lie ahead for Coinbase? Almost certainly. Will Coinbase survive them? Who knows. Are your funds safe if they don’t? Probably not. Does Brian Armstrong care? Also, probably not.
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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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