Cryptocurrency exchange Coinbase (NASDAQ: COIN) lost close to half-a-billion dollars in the first quarter of 2022, which helped push its stock price down to less than one-fifth of the all-time high set a little over one year ago.
Figures released Tuesday show the cryptocurrency exchange lost a total of US$430 million in the first three months of 2022 compared to a net profit of $771 million in the same period last year and an $840 million profit in Q4 2021. Adjusted earnings tumbled from $1.2 billion in Q4 to just $20 million in the most recent quarter.
Other metrics were similarly dire, with net revenue falling by more than one-half from Q4 to $1.165 billion. Monthly transacting users fell by 2.2 million to 9.2 million, missing Bloomberg’s consensus estimate of 9.6 million.
Trading volume totaled $309 billion, down from $547 billion in Q4 and from $335 billion in the same period last year. Both retail ($74 billion, -58% Q-on-Q) and institutional ($235 billion, -37%) trading was in the red, with the retail figure representing an all-time low for the firm, suggesting a greater number of ‘minnow’ customers have belatedly figured out that this speculative game is rigged against them.
Despite this apparent awakening, Coinbase has been furiously adding new utility-free tokens to tempt customers back into the crypto casino, even as customers seem to have cooled on the prospects of wagering on tokens they’ve never heard of. BTC and Ethereum accounted for 24% and 21%, respectively, of Q1’s trading volume, up from 16% apiece in Q4. Meanwhile, ‘other crypto assets’ – aka crap tokens owned by venture capital firms with seats on Coinbase’s board of directors – saw their trading volume fall 13 points to 55% of the total.
How low can you go?
One year ago, Coinbase’s shares charged out the gate the day of its direct listing on the Nasdaq, hitting an all-time high of $381. But enthusiasm quickly cooled, and while the shares enjoyed a brief resurgence during last November’s ‘crypto’ bubble, Santa brought little but lumps of coal for most Coinbase investors.
Dunno if Armstrong’s a Star Wars geek but Coinbase’s shares got a modest bump on May 4, briefly topping $130. However, it’s been one giant slide into the Death Star’s trash compactor ever since, barely staying above $100 by the end of last Friday’s trading.
Monday saw the stock struggling to stay above $80 following the stock’s single-biggest daily decline (-18%). Tuesday brought a new record low of $73 after a 12.6% decline. The carnage has only accelerated in after-hours trading, with the price threatening to slip below $60 at several points.
Blood running in the streets
Coinbase gamely tried to put a positive spin on its negative performance, saying the downturn reflected the “trend of both lower crypto asset prices and volatility that began in late 2021.” Undaunted, Coinbase claims to “remain as excited as ever about the future of crypto.”
On the ensuing analyst call, Coinbase CEO Brian Armstrong maintained the ‘this is fine’ company line. Noting that the company just celebrated its 10th birthday and had weathered multiple bear markets over that span, Armstrong said that just as there was irrational exuberance during bull markets, the current market mindset was “irrationally pessimistic.”
Armstrong added that we wouldn’t see “blood running in the streets” unless the current downturn extended for at least four consecutive quarters. Coinbase CFO Alesia Haas clarified that the company has a goal of capping 2022’s potential full-year adjusted earnings loss at “approximately $500 million.”
Armstrong claimed that Coinbase operated better in bear markets and would look to use the $6.1 billion in cash and equivalents currently sitting on its balance sheet—which, given the share price tumble, now represents nearly one-third of the company’s market cap—to make acquisitions and develop new products while its less comfortable rivals pull back on their reins.
Asked whether Coinbase would use any of those spare billions to improve shareholders’ lot by repurchasing company stock, Haas said there were currently “no commitments” to return capital to shareholders. And just FYI, that lack of commitment could also extend to the company’s rank-and-file customers.
A Tuesday filing with the U.S. Securities and Exchange Commission (SEC) notes that, as of March 31, Coinbase held $256 billion in fiat and cryptocurrency on behalf of its customers. Coinbase cautioned that “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.”
Needless to say, customers probably took cold comfort from Coinbase’s decision to tack on a #wagmi (‘we’re all gonna make it’) hashtag to the end of its Q1 report.
Putting the ‘pliant’ in compliance
Coinbase added 1,200 new staff since its previous earnings report, leading one analyst to ask what all these extra bodies were doing. Biz-dev VP Emilie Choi said the majority were going into product engineering and design, but the company was also “investing in compliance,” an area in which “headcount matters.”
That compliance focus probably came as a surprise to regulators in India, which blocked Coinbase from using the Unified Payments Interface (UPI) system the same day the company began offering full-service trading operations to local customers. Armstrong argued that a local Supreme Court ruling should have permitted the launch to go ahead but local officials had applied “soft pressure behind the scenes” to derail this plan.
Armstrong insisted that Indian operations would resume as soon as possible because local residents “want crypto.” Armstrong then offered up a variation of Mark Zuckerberg’s notorious ‘move fast and break stuff’ mantra by saying Coinbase’s M.O. was to “launch even if we’re not exactly sure” how that launch will be received by local regulators. Which doesn’t suggest a real strong commitment to complying with regulatory edicts, but you know, it’s what the people want, right?
Lightning in a bottle (or the trash can?)
Digital currency trading may be in the toilet but 54% of Coinbase’s active users are reportedly doing more than just trading ‘crypto,’ so Coinbase is pinning its future growth hopes on product development. This includes Coinbase’s new NFT marketplace, which has been greeted with a collective yawn and declining user numbers each day since its launch. Armstrong opted against sharing any metrics, saying little beyond the fact that there was “lots of inventory.”
Coinbase is also excited about “the expansion of our staking offering,” which was the site’s most popular non-investing product. That sentiment appears to have been written long before the recent Terra/Luna/UST debacle exposed the idiocy behind guaranteeing excess returns from staked assets of questionable backing.
While the company says it’s laser focused on expanding its Coinbase Wallet functionality to make it increasingly safe and easy to use, Armstrong was less clear on the exchange’s plan to integrate Layer 2 ‘solutions’ such as the Lightning Network (aka the digital kludge aimed at boosting BTC’s ability to handle more than seven transactions per second).
Armstrong likened Lightning to the early internet “moving from dial-up to broadband” in terms of expanding BTC’s bandwidth. He added that Coinbase wants to support Lightning and similar ‘solutions’ to Ethereum’s perpetually clogged pipes because they’re “really important” to customers but offered no timelines for when these proprietary bolt-on fixes might be bolted on to Coinbase.
There would be no need for bolting anything had Coinbase dropped its longstanding prejudice against Bitcoin Satoshi Vision (BSV), which has no upper limit for transaction volume on its main layer and imposes fees measured in fractions of a penny. Yet Coinbase continues to ignore BSV, while keeping its customers in the dark by ‘passing off’ BTC as Bitcoin.
That willful ignorance led BSV supporter—and Bitcoin inventor—Dr. Craig Wright to file intellectual property claims against both Coinbase and rival exchange Kraken. With financial damages from the suit potentially stretching into the billions, perhaps Coinbase is simply playing it safe by refusing to return excess capital to shareholders.
On Monday, Coinbase co-founder Fred Ehrsam cryptically tweeted “Thank god the euphoria is over,” which struck many as rather transparent whistling through the graveyard as Coinbase share price cratered. Ehrsam can (literally) afford to joke, as he dumped nearly half-a-billion worth of his Coinbase shares following its direct listing. But now, with the bloom firmly off Coinbase’s rose, shareholders may not share Ehrsam’s gallows humor.
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