Coinbase (NASDAQ:COIN) is back in the news for laying off 20% of its staff. This is the second round of Coinbase layoffs in under a year and just another development in a massive, ongoing wave of crypto layoffs plaguing the industry. But are these layoffs going to bring much-needed stability to the market? No.
If crypto hopes to get back on the right track, simply laying off employees and “hodling” for dear life won’t work. Instead, the market must undergo massive consolidation. It’s only after most of the world’s existing crypto projects die off that the market will truly right its course.
Crypto projects come and go — that’s the simple nature of the game. At least, that’s the theory. The free-market economy is supposed to be the judge, jury and executioner for companies. Craft a business that doesn’t serve a practical purpose? Supply and demand will ensure that business doesn’t survive.
Except that’s not how things have been for the crypto world, which especially lauds its “free market” traits. Projects don’t collapse and disappear, they simply lie dormant. Terra (LUNA-USD) evidences this enough. When the Terra ecosystem collapsed — catapulting the market into this ongoing crypto winter — LUNA didn’t disappear. Rather, it was haphazardly rebranded, duplicated and put back on sale. More than $240 million worth of LUNA has traded hands over the past 24 hours and another $160 million of Terra Classic (LUNC-USD), too. Most of this volume is occurring on large, centralized, Coinbase-like exchanges like Binance (BNB-USD) and Kraken.
The recent Coinbase layoffs may seem unrelated to these gripes about failed crypto projects never truly disappearing. However, they’re actually interconnected. Coinbase’s layoffs have everything to do with the crypto winter — and the crypto winter has a lot to do with exchanges like Coinbase retaining support for failed projects.
Is the Crypto Winter Really Helping the Market?
Bad projects exist for many reasons. One might mint a deflationary “Inu” token as a meme-fueled cash grab. Some create tokens to commit pump-and-dump schemes, fleecing unlucky victims. Others might make a project they genuinely think is great but it ends up being riddled with holes or, in the case of Terra, lacking proper backstops for when things go awry.
Given the high-volume investing that takes place in crypto, failures ripple across the industry frequently. Terra’s collapse bankrupted three different companies overexposed to LUNA. Even FTX was tarnished by the LUNA contagion, which ultimately helped trigger its own bankruptcy and continue the cycle with FTX Token’s (FTT-USD) failure.
With the stock market, bad stocks disappear. Their stocks don’t continue to trade on Wall Street. However, many cryptos continue to trade long after they collapse. LUNA and LUNC are still available to trade. So is FTT. Pump-and-dump tokens often stay available long after they are abandoned as well.
What is left is a sort of living graveyard of thousands of projects in various states of decay and only a few dozen or so with the practicality, real-world applicability and quality expected of an industry that once boasted a nearly $3 trillion market capitalization. Meanwhile, though analysts have been predicting a mass failure of cryptos in the mid-future, we are actually seeing the market bloat without much consolidation.
Coinbase Layoffs: A Short-Term Solution to a Long-Term Issue
The Coinbase layoffs are one of the many effects of the crypto winter. But are they a real solution? Obviously not. Coinbase’s second round of layoffs is just the company trying to keep its head above water. By reducing the workforce, it hopes to cut costs long enough for the market to turn around.
This isn’t a long-term solution to the market’s woes. If the crypto winter continues, it almost certainly won’t be the last round of layoffs. And, unfortunately for Coinbase and other centralized exchanges, the way to right the market won’t come cheap.
The biggest need for the crypto industry is for a period of slimming down to take effect. Investors can’t be confident in a market oversaturated with project corpses and corpses-to-be. If Coinbase and other centralized exchanges were to drop these cryptos, they could accelerate this process. Coinbase supports more than 8,800 different crypto assets. Binance supports more than 600, including LUNA and FTT.
Instilling confidence in the market is of the utmost importance. Although trimming the fat — and there’s a lot of fat — may hurt balance sheets short-term, it will make favorable conditions return quicker and last longer. Job cuts didn’t work in June 2022 and they won’t work now. But providing investors with only the most fundamentally sound cryptos could boost confidence in a whole new way.
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.