The market for cryptocurrencies had an absolute monster year in 2021, almost tripling in value and ending the year at roughly $2.2 trillion. Coinbase Global (COIN 5.68%), a leading crypto brokerage and exchange business, took advantage of the strong market conditions to go public in April last year. But since then, shares have cratered 85%.
With the Federal Reserve adopting an aggressive stance to hike interest rates in order to curb rising inflation, investors have soured on cryptocurrencies and growth tech stocks, which has significantly damped the outlook for Coinbase. The business first implemented a hiring freeze, then rescinded pending job offers, and most recently, leadership decided to cut 18% of the workforce.
Coinbase is certainly facing tough times, but here's why I'm not worried.
Not a good time for crypto
When the crypto market was soaring in 2021, Coinbase posted an annual profit of $3.6 billion on revenue of $7.8 billion. Both figures were up massively compared to the prior year. However, in the first quarter of this year, revenue fell 35% year over year, and Coinbase's retail monthly transacting users totaled 9.2 million, down from 11.4 million in the fourth quarter of 2021.
Because 87% of Coinbase's revenue comes from transaction fees when users trade on the platform, it's obvious that a decline in interest in cryptocurrencies is a major headwind for the company. Management has emphasized areas that benefit when crypto moves from a speculative phase to one focused on utility, like Coinbase Cloud (a blockchain developer platform) and Coinbase NFT (a marketplace for non-fungible tokens), but these initiatives don't really move the needle for the business today.
The truth of the matter is that cryptocurrencies are extremely volatile, exhibiting a boom-and-bust cyclicality that makes it difficult for companies to navigate. Brian Armstrong, Coinbase's founder and chief executive officer, says that the company grew too quickly during crypto's bull run last year. And now, the business needs to manage expenses and increase efficiency.
What's stunning is that Coinbase ended 2021 with plans to hire 6,000 new employees in the current year. And this is after tripling the workforce from the beginning of 2021 to the end of the most recent quarter. With other large tech companies cutting staff, this move by Coinbase shouldn't come as a surprise. In fact, I'd argue that investors should actually expect these types of corporate decisions given just how nascent and undeveloped the crypto industry still is.
This is the right move
It's certainly heartbreaking to hear about job offers being canceled and employee layoffs. But from the perspective of Coinbase shareholders, it's necessary to focus on the long term. And this is exactly what the management team preaches for investors who want to buy the stock. This is an ultra long-term investment.
If laying off nearly a fifth of the employee base better positions Coinbase to navigate a potential recession and crypto winter, which is an extended period of time where crypto prices remain under pressure and the industry at large has fallen out of favor, then it is no doubt the right move. Even the most qualified executives in the industry, Coinbase's management team, have no idea what crypto prices will do in the near term. Their only proper course of action is to manage costs, maintain operating flexibility, and place the business in the best position to succeed and weather any downturn.
"Coinbase has survived through four major crypto winters, and we've created long-term success by carefully managing our spending through every down period," Armstrong said in a blog post.
According to Coinbase's Q1 shareholder letter, the business has $6.1 billion in cash and cash equivalents on the balance sheet. And management believes that this is an optimal amount to make it through whatever the economy brings. Cutting 18% of the staff is a tough decision, but if it increases the chances of long-term survival, then it makes sense. Plus, while many other crypto businesses fail, Coinbase's competitive position can strengthen.
I am bullish on the potential for cryptocurrencies, so I think the current situation with the entire industry is a huge opportunity for those who share my perspective. A decade from now, I firmly believe Coinbase will be a much bigger and more thriving business than it is today.
