Coinbase, founded in 2012, established itself years before the cryptocurrency craze or the current “crypto winter” hit the U.S. It has now captured a $13.8 billion market cap with about 5,000 employees and $256 billion in assets on the platform. “Coinbase has been through a few crypto winters and, each time, they obviously have survived,” said John Todaro, a crypto asset researcher for Needham & Co. “The winter would have to get progressively worse for Coinbase to be in any real danger.”
Like millions of people, Michelle Milkowski bought Bitcoin and other digital currencies as the crypto industry spent millions of dollars on marketing. For Michelle Milkowski, who lives in Renton, Washington, one thing led to another.
Because her son’s daycare closed in the early days of the pandemic, she had some extra cash. So, like millions of other people, Milkowski downloaded the Robinhood trading app. Back then, the stock market was at the beginning of what would become a record-setting run, and Milkowski’s new pastime became profitable.
She kept trading shares, but in early 2021, something else caught her eye: Milkowski noticed the value of Bitcoin had reached $60,000. “I just couldn’t believe it,” she says, noting she first heard of the popular cryptocurrency in 2016, when its price was less than a hundredth of that. “I felt like I’d just missed the boat, because I could have bought it before it skyrocketed.”Last spring, Milkowski took another look at Bitcoin, and she took a leap. “Better late than never,” she remembers thinking.
First, Milkowski bought $500. Then, $10,000. By the end of last year, Milkowski estimates, she had spent close to $30,000 on crypto. In hindsight, the timing was terrible. Like many first-time investors, Milkowski bought digital currencies as they were approaching all-time highs, and as companies were spending tens of millions of dollars on marketing to broaden crypto’s appeal.
Quarterback Tom Brady and his wife, supermodel Gisele Bündchen, starred in an ad for FTX, and a commercial for Crypto.com featured Academy Award-winning actor Matt Damon. These were designed to appeal to a potential investor’s fear of missing out. “Fortune favors the brave,” Damon says. The ads included little-to-no explanation of crypto, and how risky the unregulated asset is.
So far this year, Bitcoin has lost half its value. About two weeks after that Crypto.com ad debuted, Bitcoin set a new record: $68,990. Today, it’s less than a third of that. Although its backers long claimed it would be a hedge against high inflation, that hasn’t proven to be the case. As inflation has surged, Bitcoin has fallen in tandem with high-growth tech stocks. Rising interest rates have made speculative assets less appealing, and cryptocurrencies are no exception.
Milkowski, who is a manager for a large insurance company, says those ads and the “crazy exuberance that surrounded crypto” appealed to her. “You know, that gives it some sort of approval that not just scammers are using it,” she says. “Then, I felt safe to try it out, to put my money in there.”
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Milkowski ended up branching out from Bitcoin, into Ethereum, Shiba Inu, and Luna, a so-called “stablecoin” that collapsed quickly and catastrophically in May. Early on, Milkowski resolved not to risk more than she could afford to lose, and Ramiro Flores set the same ground rules when he bought Bitcoin for the first time in 2018.
“I like gambling. I go to Vegas quite a lot,” he says. “So, I was like, ‘Hey, you know what? Like, this is just like a little trip to the casino.'” Flores, who used to be a firefighter in Edinburg, Texas, remembers talking about cryptocurrency in the firehouse. After he did some research, he bought $2,000 worth of Bitcoin.
At its peak, the total value of cryptocurrencies worldwide was about $3 trillion. Today, it is about $1 trillion.Flores calls the downturn heartbreaking, but it hasn’t shaken his resolve. “It’s totally a bummer,” he says. “But I have faith.” Flores has continued to buy Bitcoin and Ethereum, and he says he believes they will bounce back. Eventually.
He is also optimistic wider adoption of digital currencies will lead to changes to banking and the economy. “Right now, I’m down some money, but I’m like, ‘Hey, if I don’t sell, I don’t lose out.’ I don’t lose that money, technically,” he says. “So, I’m just going to keep on riding this little roller coaster that we’re on.” At the beginning of the pandemic, Michelle Milkowski started investing in penny stocks. A few months later, she bought cryptocurrency for the first time.
For Milkowski, the ups and downs — well, especially the downs — got to be too much, and she decided to get off. “There’s definitely peace that comes with just selling off such a volatile asset,” she says. “I don’t have to worry, ‘Am I losing $500, $1,000 today?'” In May, Milkowski cashed out completely. She decided to cut her losses, which ended up being around $8,000.
By: David Gura
Coinbase’s $6 billion in reserves bolster his confidence. That money is “a pretty solid cushion” to help Coinbase get through turbulent times, Todaro said.
Profits based on number of transactions
Coinbase didn’t respond to a request for comment on how the crypto market has impacted business. CEO Brian Armstrong said during an earnings call in May that Coinbase officials “tend to do our best work in a down period.” Still, one of the reasons Coinbase is struggling now is because there are fewer people on the platform making transactions. Coinbase makes a majority of its revenue by charging a 1% fee on every crypto transaction, but company officials said in May that the volume of transactions has slowed.
The number of Coinbase monthly users has dropped 19% since the end of last year, the company said. The drop in transactions makes Coinbase’s $6 billion war chest even more important, said Devin Ryan, an equity research analyst at JMP Securities. “They are one of the best capitalized firms,” Ryan told CBS MoneyWatch. “And even though they have a business model today that’s based off transactions, they’re building one of the most diversified businesses in the (crypto) industry.”
Crypto downturn is exacerbated by soaring inflation
Not only is Coinbase seeing fewer transactions, but crypto prices have dropped to their lowest levels this year. The price of bitcoin, ethereum and other major tokens started falling this spring as rising inflation tightened its grip on the U.S. economy. With the cost of everyday items like gas and groceries increasing, investors began pulling their money out of investments they deemed risky, including cryptocurrencies. As investors sold off their digital assets, the price of crypto fell further.
Stablecoins losing their pegs to the U.S. dollar also played a role in investors’ departure from crypto in recent months. Individuals who had grown dependent on stablecoins like luna and terraUSD to shield their money from the wild swings typical of many cryptocurrencies, were stunned to see both those coins fall under $1 in May — something that was never supposed to happen. The price drop of the two benchmark stablecoins further eroded investors’ faith in the crypto market.
Meanwhile, bitcoin’s price, which peaked last November at around $68,000, is down 56% since the beginning of this year, trading at around $20,250 as of Wednesday. Ripple has fallen 61% to around 30 cents and ethereum is down nearly 70% to $1,140. Ryan believes the recent price slumps won’t last forever and that investors will return to crypto. Once they do, they will likely use Coinbase, according to Ryan.
“We expect them to gain even more market share after this, but no doubt we’re in a difficult moment right now in the market,” he said.
As the crypto market goes, so goes Coinbase
Coinbase is a real-time case study of what happens to a crypto company when the price of bitcoin and tokens fall, analysts say. Coinbase’s future hinges on prices growing stronger, as do the futures of other major crypto platforms like FTX and Kraken, analysts said. The crypto landscape is much broader and richer now than it was in April 2021 when Coinbase went public and its shares were trading at almost $400 a piece.
Competitors like Binance and Crypto.com have captured investors’ attention, while crypto scams and hacks have grown more lucrative, leading federal lawmakers to push for more regulation around digital assets. All that activity, analysts said, has created an even greater divide between pro-crypto investors and skeptics. How quickly Coinbase rebounds depends on how many investors “believe there’s a big future for digital assets,” Ryan said.
“If you have a positive view on the future of the crypto economy and you’re bullish on where it can get to, then that should be your same view on Coinbase,” he said.
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