Coinbase loses $1.1 billion, stock compensation gravy train rides on

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Coinbase (NASDAQ: COIN) lost over $1 billion in the second quarter while warning investors that the cryptocurrency exchange expects this current ‘crypto winter’ to be a multi-year affair.

Figures released Tuesday show Coinbase generated revenue of $803 million in the three months ending June 30, a more than 60% decline from the same period last year and down 31% sequentially. The company booked an adjusted earnings loss of $151 million compared to a $1.15 billion gain in Q2 2021, while Coinbase’s net loss for the quarter came in just shy of $1.1 billion instead of the $1.6 billion profit this time last year.

The net loss was more than twice the $430 million the company lost in Q1 and spooked investors pushed the stock down around 5% in after-hours trading. The day had already started out broadly negative, as Coinbase’s share price fell 10.5% Tuesday to close at $87.68 before the Q2 figures were released.

Coinbase tried to soften the blow by calling Q2 “a test of durability” for all digital asset firms and claiming that, while “crypto is cyclical,” Coinbase is “an all-weather company.” The company pointed to cost-cutting moves such as slashing headcount by 18% while claiming that, absent non-cash impairment charges, the net loss would have been a mere $647 million. Duh, winning…

Trading volume was down 30% sequentially to a record low $217 billion, less than half the Q2 2021 total. Retail trading took the biggest hit, falling 38% to just $46 billion, one-third of what these crypto minnows traded in Q2 2021. Institutional volume was down a little over one-quarter to $171 billion.

Coinbase was keen to point out that its Monthly Transacting Users (MTUs) fell only 2% from Q1, leaving out the fact that the transactions that appear to have been most popular with these users was conversions to fiat followed by withdrawals.

Assets held on the platform—which, remember, could be lost to customers forever should Coinbase face some sort of bankruptcy action—were down to a record low $96 billion, around 37.5% of the total sum held on the exchange in Q1.

In terms of token trading volume, BTC (31%) and ETH (22%) re-established some dominance over the plethora of shitcoins that Coinbase has listed. ‘Other crypto assets’ accounted for 68% of volume in the final quarter of 2021 but this fell to 47% in Q2. Nature abhors a vacuum, so expect a rush to list even more tokens of dubious value as Coinbase’s annus horribilis progresses.

Regardless of these grim results, Coinbase somehow found the means to dole out $391 million worth of stock-based compensation in Q2, an even higher sum than rained down on company insiders in Q1. Coinbase said trading volume and MTUs were both lower in July, and the company expects Q3’s final numbers to continue this year’s downward trajectory. But hey, stock-based compensation is expected to rise to $400 million in Q3, so pass the cake, Antoinette.

The call

The Coinbase execs who participated in Tuesday’s analyst call were keen to hammer home the narrative that the current downturn is making everyone look bad. Coinbase CEO Brian Armstrong said, “We’ve seen this all before” and that “down cycles are actually a breath of fresh air” in that the company gets to stop focusing on that pesky growth/scaling stuff and instead look at things like “paying down tech debt.”

Armstrong said Coinbase continues to look at ways to economize, which led to one of the more awkward analyst questions, namely, the fact that the company’s stock-based compensation was currently running at around half of total revenue. Chief financial officer Alesia Haas said Coinbase’s board “understood” these concerns, mumbled something about taking “a long-term view” before conceding that the stock-based gravy train wouldn’t likely slow until sometime in 2023.

As for the company’s share price hovering at less than one-quarter of its 2021 peak, Armstrong insisted that Coinbase wouldn’t be “distracted by short-term thinking.” Reminded of plummeting retail trading volume and that Coinbase makes the bulk of its fee revenue from retail traders (who pay stiffer rates than institutional fat cats), Haas said Coinbase was “okay with being a premium product” and that customers were willing to pay a premium to be able to transact with Coinbase.

Chief Operating Officer Emilie Choi didn’t offer investors any sign that Coinbase’s turnaround would be a swift one, noting that previous crypto winters were “two- to four-year” affairs. Choi went on to say that Coinbase “wasn’t looking to make a profit in every quarter or every year,” which undoubtedly came as a shock to anyone holding Coinbase stock in their 401k.

Don’t mention the war

One subject that got short shrift on the call was the recent news that the U.S. Securities and Exchange Commission (SEC) is investigating Coinbase for failing to register certain digital assets as securities. Armstrong said only that the SEC had sent Coinbase a letter in May requesting information on the assets it lists, but “we do not yet know if this will become a formal investigation.”

While Armstrong celebrated the relationship Coinbase has struck with the more crypto-friendly Commodity Futures Trading Commission (CFTC), he claimed Coinbase was willing to work with whomever/whatever to clarify “what is a crypto commodity, what is a crypto security, what is a stablecoin” and whether, as Armstrong believes, non-fungible tokens (NFTs) are “probably considered artwork.” (Unlike Coinbase’s new NFT marketplace, which is definitely considered a dud.)

This ‘kumbaya’ stance hasn’t always been the face that Coinbase execs have chosen to present to the world. Last September, when the SEC threw cold water on Coinbase’s plan to get into the crypto lending business, Armstrong said the regulator was engaged in “really sketchy behavior,’ while chief legal officer Paul Grewal wrote a tone-deaf blog post saying the company had no idea why an unregistered bank shouldn’t be allowed to offer banking products.

Grewal took a similarly aggressive tone in a more recent blog post that pushed back on the SEC’s claim that at least nine tokens listed on the exchange were securities. Sadly for Grewal, he offered no evidence whatsoever of the “rigorous process” that went into deciding what tokens to list, including whether or not Coinbase has an undisclosed financial interest in said tokens.

Childish and ill-advised grandiloquence and bluster

John Reed Stark, who toiled in the SEC’s Enforcement Division for nearly two decades, wrote a blog post this week lamenting the “grandiloquence and bluster” in Coinbase’s approach to SEC probes, something Stark described as the “childish and ill-advised modus operandi” of many companies in this sector.

Stark also detailed the numerous arrows in the SEC’s enforcement quiver. Among these potential avenues of attack are the fact that “Coinbase’s previous SEC disclosures relating to litigation seem not only poorly drafted, but arguably misleading.”

It’s worth remembering that the ‘risk factors’ section of Coinbase’s prospectus included “the identification of Satoshi Nakamoto, the pseudonymous person or persons who developed Bitcoin, or the transfer of Satoshi’s Bitcoins.” And yet Coinbase has never formally acknowledged legal warnings issued by Dr. Craig Wright, the individual behind the Satoshi moniker, or the civil suit filed against it for ‘passing off’ the BTC token as the Bitcoin described in Wright’s 2008 white paper.

Stark goes on to warn Coinbase’s C-suite execs and directors regarding potential conflicts of interest in the exchange’s listing of so many tokens of dubious value. Noting the “incestuous nature of companies within the crypto industry,” Stark says the SEC will look carefully at whether any friends or family of Coinbase’s inner circle profited from the listing of said tokens.

During Tuesday’s call, Armstrong called Coinbase “a bellwether for the rest of the [crypto] industry.” The rest of the industry best hope Armstrong is way off base, because Coinbase appears to want to act out that scene from Monty Python & The Holy Grail, with Gary Gensler as King Arthur and Armstrong as the Black Knight, except with financial red ink standing in for the blood spurting out the arm-holes.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, 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.