Leading crypto exchange Coinbase reported a Q2 net loss of just under $1.1 billion this afternoon, or $4.98 a share, as sales fell more than had been expected and the company’s company’s stock tumbled 6%.
The beleaguered exchange has been hit hard in recent months by a confluence of declining cryptocurrency market conditions, regulatory pushback and investor uncertainty that has dragged its stock price down over 55% since late March.
Coinbase recorded the majority of its $802.6 million in revenue last quarter–over 80%–from transaction fees on sales and exchanges of cryptocurrency. That’s down 61% from the corresponding 2021 quarter and 35% less than Q1.
Analysts had predicted revenue of $868.4 million for the quarter and an adjusted per share loss only about half as severe as reported. In Q2 2021, the company earned $1.6 billion.
The below-consensus revenue may have been reflected rising use of the exchange by customers who aren’t there currency trading, according to Michael Miller, an equity analyst at Morningstar. “Coinbase’s problem wasn’t so much that customers abandoned it — transacting users were essentially flat sequentially — but that there was a shift toward non-traders, such as those involved in staking.”
Despite the flood of red ink, Coinbase has an ace in the hole: its $6.2 billion of cash in the bank, barely changed from Q1. That figure includes $362 million of stablecoin USDC.
“Coinbase is really caught out with its cost structure, and now that crypto prices have come way down, they’re in a position where they do need to cut costs pretty dramatically,” says Miller. “While they are caught out on the costs side, though, they did go into this crypto downturn with a very strong balance sheet.”
The exchange cut costs aggressively last quarter, laying off 1,100 employees, 18% of its workforce, in mid-June and reducing its marketing outlays from a high point last fall (in which it spent $14 million on a single 60-second Super Bowl ad). Operating expenses, adjusted to remove cryptocurrency impairments, fell to $1.48 billion in Q2 from more than $1.5 billion in each of the two previous quarters but were still higher than $1.3 billion a year earlier.
“Expenses haven’t come down much—they were more or less flat sequentially. Coinbase did reduce cost guidance for the rest of 2022, though,” says Miller. “It does sound like they’re comfortable with this level of losses—they were within the guardrails they set. Unless revenues decline further, I wouldn’t expect to see any further layoffs.”
Coinbase’s web engagement fell dramatically, according to data from Simliarweb: visits to coinbase.com fell 45% in June, even while U.S. sites of competitors like FTX showed them more than doubling. Moreover, Coinbase’s weekly web display ads have dropped by over 35% since early June.
“By looking at web traffic and app traffic, you just see a trend towards somewhat of a decline in engagement for cryptocurrency in general,” says David Carr, senior insights manager at Similarweb. “But for Coinbase, the decrease in the percentage of customers using the app on a regular basis and the decrease in the amount of time they spend on the app are signs of lesser enthusiasm.”
Ben Weiss, CEO of crypto financial services and Bitcoin ATM provider CoinFlip, says the market may be overly pessimistic. “I feel that the market is conflating the performance of crypto assets with the companies in the crypto ecosystem, and therefore the reduction in Coinbase stock price is possibly an overcorrection,” says Weiss. “Coinbase is a household name in the crypto space and is extremely competitive among crypto exchanges. While companies must continue to innovate to stay relevant, Coinbase is still extremely well positioned among exchanges to continue to capitalize in the crypto space.”
I am a reporter for Forbes’ Money and Markets team. Originally from New Haven, Connecticut, I currently live in New York City.
Source: Coinbase Losses Exceed Expectations As Sales Deteriorate
Critics:
Coinbase operates as a remote-first company and has no physical headquarters As part of its SEC filing to go public, the company reported 43 million verified users, 7,000 institutions, and 115,000 ecosystem partners in over 100 countries. It also reported net revenue of $1.14 billion in 2020, up from $483 million the previous year. The company also reported a net income of $322 million after posting a loss in 2019.
Out of the $782 billion worth of assets on the crypto market, some $90 billion worth is held on the Coinbase platform. As of 2018, the company offered buy/sell trading functionality in 32 countries,while the cryptocurrency wallet was available in 190 countries worldwide. In a May 2022 Form 10-Q filing, Coinbase stated that “because 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“.
The “Coinbase Effect” refers to the rise in price of cryptocurrencies listed for sale on a dominant crypto exchange such as Coinbase in the days after the news becomes public. According to Barron’s, the effect of getting a cryptocurrency listed on the exchange plays a big role in what cryptocurrencies gain widespread acceptance.
On February 16, 2018, Coinbase admitted that some customers were overcharged in error for credit and debit purchases of cryptocurrencies. The problem was initiated when banks and card issuers changed the merchant category code (MCC) for cryptocurrency purchases earlier that month. This meant that cryptocurrency payments would now be processed as “cash advances”, meaning that banks and credit card issuers could begin charging customers cash advance fees for cryptocurrency purchases.
Customers who purchased cryptocurrency on their exchange between January 22 and February 11, 2018, could have been affected. At first, Visa blamed Coinbase, telling the Financial Times on February 16 that it had “not made any systems changes that would result in the duplicate transactions cardholders are reporting.” However, the latest statement from Visa and Worldpay on the Coinbase blog clarifies: “This issue was not caused by Coinbase.
In March 2018, Quartz reported that the number of monthly customer complaints against Coinbase jumped more than 100% in January of that year, to 889, citing official Consumer Financial Protection Bureau data, with more than 400 of those categorized as “money was not available when promised”.The article also noted that the company was subsequently increasing its customer service staff to reduce wait times. In December 2021, CNBC reported that Coinbase froze the cryptocurrency GYEN due to a sudden price spike, resulting in many traders losing money.
On July 22, 2022, a former Coinbase product manager, Ishan Wahi, along with Nikhil Wahi (Ishan’s brother) and Sameer Ramani (a friend), was charged in the first-ever insider trading case in cryptocurrency by prosecutors for the Southern District of New York and the Securities and Exchange Commission.According to the complaint filed in SEC v. Wahi, Ishan Wahi allegedly shared information that certain tokens were about to be listed by Coinbase with Nikhil Wahi and Ramani, who then allegedly acted upon that information to make trades for an alleged illicit profit in excess of $1.5 million.
According to federal prosecutors, Ishan Wahi purchased a one-way ticket to India upon being summoned by Coinbase to the company’s Seattle office for a meeting. Wahi was subsequently intercepted by law enforcement from boarding a May 16 flight to India. Coinbase’s chief security officer, Philip Martin, noted that the company provided prosecutors with information from an internal investigation.
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