When the last crypto winter came around in 2018, the landscape looked very different. Back then there were no publicly traded cryptocurrency exchanges and very few NFTs, and memecoins had not yet taken off. Now cryptocurrencies have evolved to the point that entire business models are dependent upon the health of the crypto economy. 

Coinbase (COIN 4.68%) is the largest cryptocurrency exchange in the United States, and for good reason. Its technology simplified many of the complexities that can come with investing in cryptocurrencies. The company experienced massive growth in 2021 thanks to a crypto bull market and an IPO on the Nasdaq.

While Bitcoin and many other cryptocurrencies were hitting new all-time highs, Coinbase boasted an all-time high of 89 million users. Just a year before there were only 43 million using the exchange.

Winter arrives

But as 2021 came to an end, crypto started to cool off. And since Coinbase's business model is dependent upon crypto being in a bull market, 2022 has not treated the crypto exchange very well.

In mid-June Coinbase made headlines when it announced that it was planning on laying off 18% of its workforce to cut costs. It will also be freezing all planned new hires. Coinbase CEO Brian Armstrong cited a multitude of factors to back the move, like a possible recession looming, over-hiring in the past, and over-allocating funds during the 2021 bull market.

In its earnings report for quarter one, Coinbase's revenue was down more than a quarter (27%) from last year. Monthly trading volume was down nearly 44%. And the number of active monthly users on the platform took another hit, falling from 11.4 million to 9.2 million users.

What the experts say

Coinbase's stock has not been spared. It is down more than 30% in just the last month, and analysts have added fuel to the fire, with financial firms like Moody's and Goldman Sachs both downgrading the stock. 

In Moody's recent downgrade, a plethora of factors were highlighted to support the dismal outlook on Coinbase. At the top of the list was the hit that fees would take. Moody's pointed out that when crypto prices are high and users are making more trades, then Coinbase earns more revenue. That revenue has been stunted since the crypto market started to tumble. And with few signs of a quick turnaround in crypto prices, Moody's is keeping a close eye on Coinbase for an even further downgrade.

Analysts from Goldman Sachs shared a similar view of Coinbase's future. Goldman Sachs demoted Coinbase from a "neutral" rating to a "sell". The initial price target of $70 per share is now at $45. Like Moody's, Goldman Sachs believes that Coinbase will have a difficult time generating revenue with crypto prices as low as they are. To mitigate costs, Goldman Sachs speculated that more layoffs could come. Without these cuts, Goldman Sachs estimated that year-over-year revenue could fall by 60% or more.

Without a swift rebound in crypto prices or a dramatic trimming of expenses, it looks like Coinbase will continue to suffer. The fees that Coinbase charges are its primary source of revenue. These fees are reflected as a percentage of the transaction being made. If people are spending less on their crypto investments, then Coinbase will continue to get a smaller cut.

To compound this lack of revenue, it looks like Coinbase over-allocated resources during the bull run last year. In preparation of a bull run continuing, Coinbase invested more in its customer support, legal, compliance, and business support endeavors. Those sectors received 39% more funding than the prior quarter. As a result, for the first time since the company began publicly disclosing finances, operating expenses outpaced revenue.

Investors haven't shied away from kicking the stock while it's down. Since its IPO in April 2021, Coinbase is down more than 85%, and recently hit an all-time low of $51. 

Unfortunately, the worst may not be over. This could be a long crypto winter for Coinbase.