Coinbase is Getting Creative. Will It Be Enough?

Coinbase (NASDAQ:COIN) is in the headlines again, two weeks after laying off 18% of its staff. Twelve days before that, they’d sent new hires one of the most brutal H.R. mass emails I’ve ever seen: “Just kidding! Our hiring freeze does affect your job offer, after all!” (At least the “Chief People Officer” said they’ll get severance.)

The Coinbase (COIN stock) logo on a smartphone screen with a BTC token. Crypto winter is setting in.
Source: Primakov /

And once again…the spotlight is on Coinbase for all the wrong reasons:

Even after the job cuts, “we believe Coinbase will need to make substantial reductions in its cost base in order to stem the resulting cash burn as retail trading activity dries up,” wrote Will Nance, VP and lead analyst for Payments and Digital Assets at Goldman Sachs, in his research note Monday downgrading COIN stock.

It’s a bit rich to change your verdict from “Neutral” to “Sell” after the stock has already dropped -75%…in three months! If you weren’t necessarily in it for the long haul with COIN, the Super Bowl would have been a better time to cash out. (Or Thanksgiving.)

That said, it’s worth looking at the fundamentals…what’s changed in just six weeks since Coinbase’s last earnings report…and what it might say about the “State of the Union” in the New Digital World, generally.

Coinbase’s Finances and Outlook

The last reported quarter (Q1) was not kind to crypto-trading platforms like Coinbase. On the one hand, Assets on Platform were up +15% year-over-year, while Verified Users were up +81% year-over-year. On the other hand, those users were providing barely half the transaction revenue they had in 2021, on average.

So, all in all, Coinbase posted revenues that declined -27% and EBITDA that fell -98%, year-over-year!

Now looking at 2022 figures overall, the comparisons are even tougher. Coinbase went from net revenues of $1.1 billion in 2020 to $7.3 billion in 2021! The Goldman analyst is looking for $2.9 billion in 2022, a 60% drop.

Moody’s, the global credit-rating agency, chimed in, too. With basically the same reasoning as Goldman, Moody’s dropped Coinbase’s corporate debt from “Ba2” to a “Ba3” on its rating scale. Both of these fall into the “non-investment-grade” category…or, as they’re often nicknamed, “junk bonds.”

For comparison, Interactive Brokers (NASDAQ:IBKR) does get an investment-grade rating (A-) from S&P Global as of June 16. And while Interactive Brokers took a similar revenue hit in Q1, of -27%… Its EBITDA, down -37% year-over-year, didn’t dry up nearly as badly as Coinbase.

Interactive Brokers “has successfully navigated the ‘zero commission’ trend that hit the industry starting in November 2019,” S&P writes:

“Unlike its competitors, IBG offers customers both its traditional low-commission pricing option and a zero-commission option that includes revenue-increasing measures (such as higher rates on margin loans) to offset the reduction in commissions.”

Coinbase, meanwhile, is charging up to 4%! And IBKR, “as a blue-chip, diversified, long-standing broker with high-quality clients,” is still able to trade at a much higher valuation even in this bear market, as Seeking Alpha reports. Far from dropping -60%, revenues at Interactive Brokers are forecast to grow +12% this year.

Now Coinbase is Getting Creative

If users aren’t as interested in their normal trades lately… How about some derivatives? After all – they’re all the rage:

Crypto derivatives get five times the trading volume of the regular “spot” market in crypto, as Carnegie Mellon University found in 2021. “On a busy day, over $100 billion in these derivatives are traded, rivaling the daily volume traded in the New York Stock Exchange.”

So, this month Coinbase is releasing its first derivatives: “Nano Bitcoin Futures.”

Derivatives are something Coinbase has been working towards since at least January. “At 1/100th of the size of a Bitcoin,” Coinbase writes, its Nano Bitcoin Futures contract “requires less upfront capital than traditional futures products and creates a real opportunity for significant expansion of retail participation in US regulated crypto futures markets.”

Bitcoin “perpetual futures” at FTX (FTT-USD), for instance, still cost $20,000. And it’s got to be encouraging to competitors like Coinbase to see that their trading volume has held pretty steady in the bear market vs. the 2021 bull.

Coinbase is also going to try and fix its fee problem… by closing down Coinbase Pro.

See, if you were switching between Pro and regular, you were probably paying way lower fees. (If you knew to do that!) Now, “a replacement feature called Advance Trade is going to be rolled out in the normal Coinbase app…[with] the same volume-based fees as Pro,” CoinMarketCap reports.

Unfortunately, the Goldman analyst who just declared COIN a “Sell” is not a big fan of the “fee compression” this move could cause. Probably because, you know, Coinbase is already struggling to maintain positive EBITDA as it is – even with 81% more users in Q1, year-over-year.

But Coinbase Has a Bigger Problem

There’s one enemy that trading platforms can’t do much to fight – and you’ve been hearing its name a lot lately: Inflation.

Basically, retailers may have to drop prices to get people back into their stores… But housing prices are still elevated. And rental costs remain out-of-control!

We’re in a world where “58% of Americans are living paycheck to paycheck after inflation spike — including 30% of those earning $250,000 or more,” CNBC reported Monday.

So…how many Americans are going to be trading those less-powerful paychecks on a crypto app?

Now, Coinbase is often seen as more of an institutional platform than, say, Binance (BNB-USD). And sure, most of the Assets on Platform are institutional; so is the Trading Volume…

But when you look at Transaction Revenue, you find that 95% of what Coinbase made in Q1 was from the Retail segment. Transaction Revenue, in turn, made up 87% of its business, overall.

(And, again, Coinbase’s Advance Trade feature could mean those Retail traders see their fees drop down more to what the big traders are paying. Hopefully they really like the Nano Bitcoin Futures.)

Now, sooner or later, inflation will be beaten back. “We do not expect inflation to be red-hot into the end of the year, nor do we expect a stagflation outcome,” as Luke Lango and Charlie Shrem write for their Crypto Investor Network.

Most likely, “BTC [will] consolidate around $20K over the next six months,” Luke and Charlie conclude. Investors will just have to wait for some relief – and therefore, so will Coinbase.

Until then, check out Charlie’s free presentation on how they spot solid cryptos worth buying at a discount – like the one they just issued to members of the Crypto Investor Network.

On the date of publication, Ashley Cassell did not have (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 Publishing Guidelines. To have more news from The New Digital World sent to your inbox, click here to sign up for the newsletter.

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