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Coinbase's Latest Move Will Keep Me on the Sidelines for Now: Here's Why

By Jon Quast - Jun 20, 2022 at 12:11PM

Key Points

  • Coinbase is suddenly laying off employees after making aggressive hiring decisions.
  • Management says this decision is partly because of a possible crypto winter coming.
  • While there's a lot to like, I have reasonable uncertainty about Coinbase's ability to capture what seems to be a very large long-term opportunity.

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Rather than reacting, management should have proactively anticipated this situation.

A little more than six months ago, the entire cryptocurrency space had a market capitalization of around $2.8 trillion, according to CoinMarketCap. This valuation has aggressively dropped about 67% since. Therefore, it shouldn't come as much of a surprise that cryptocurrency exchange Coinbase Global (COIN 12.99%) is laying off about 18% of its workers.

These layoffs are logical for Coinbase, given what's going on in the space. However, the decision will keep me from buying Coinbase stock at this time.

Why I don't like Coinbase's layoffs

In a June 14 blog post, CEO Brian Armstrong talked through the difficult decision to lay off 18% of his employees. In it, Armstrong said: "We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period."

"Crypto winter" is a term used in the cryptocurrency community to describe a long period in which valuations plummet, interest dwindles, and funding dries up. 

Here's a chart to give some additional context to appreciate how sudden this change is for Coinbase.

Quarter Employee Count End of Quarter Quarterly Net Employee Additions QOQ Change
Q3 2021 2,781 605 28%
Q4 2021 3,730 949 34%
Q1 2022 4,948 1,218 32%

Source: Coinbase letters to shareholders. QOQ = quarter over quarter.

Coinbase planned to hire 6,000 new employees in 2022 alone, and was well on its way to that goal with the amount it hired in the first quarter of 2022. But on June 2, the company announced that it was freezing hiring and even rescinding some job offers that it had already made. This change was radical enough. But the decision did seem appropriate given how fast the cryptocurrency space shifted from a bull market to a bear market.

A hiring freeze seemed appropriate. However, Coinbase will now lay off almost as many employees as it hired earlier in 2022. And it's doing so to survive a possible crypto winter. That's the part I don't like.

We can debate whether the economy is entering a recession; there's not even consensus among financial professions on that. Therefore, if Coinbase didn't see a recession coming, it's excusable.

Management should have seen a so-called crypto winter coming and should have been prepared for it. We can discuss the timing. But no matter what, there will be periods of boom and bust in the Web3 space. And it's up to Coinbase to be ready for them whenever they come. After all, the last crypto winter happened in a period of economic expansion. In my opinion, it shouldn't have to course-correct this drastically or this quickly.

The Coinbase opportunity

Don't get me wrong; I believe the long-term opportunity for Coinbase is sky-high. However, many criticize the company's revenue structure: 83% of first-quarter revenue came from charging trading fees to retail investors. They will almost certainly trade less frequently now that prices are falling.

Nevertheless, Coinbase has optionality in other areas, like Coinbase Cloud. Consider that behind almost every cryptocurrency project is a team of developers who need hardware and software solutions to bring their ideas to life -- stuff that costs money. Coinbase can offer these services to developers through Coinbase Cloud, essentially powering whatever comes out of the Web3 space in the future, much like how cloud titan companies now power the internet.

Keep in mind that crypto start-ups are in a decent position right now because of venture capital. According to Forbes, venture capitalists invested $30 billion in Web3 start-ups in 2021. And billions more have been raised so far in 2022. Therefore, it's likely that developers will keep spending even in a crypto winter, and Coinbase Cloud could be a lucrative endeavor as a result.

Moreover, Coinbase is in great financial shape to endure a potential recession. At the end of the first quarter, it had $6.1 billion in cash and around $1.2 billion in digital assets. Those are ample resources to survive a slump. And having fewer employees to pay will help further.

Why I'm on the sidelines anyway

Investing isn't just about understanding the secular growth trends for the industry or appreciating a company's financial structure. A bad management team can squander a golden opportunity. Evaluating management takes time.

With Coinbase having been public for only one year, we simply don't have a long track record with its management. And for me, the sudden pivot from hiring 6,000 to laying off 18% of its employees is enough to cause me to have questions.

I'm not saying Coinbase is a bad company or that it doesn't look like a bargain today. I am saying that I'm going to keep watching, for now, continuing to verify that its management has a good handle on building the business for long-term success. Based on what we've seen, I am not yet convinced.

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Coinbase Global, Inc. Stock Quote
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