Cryptocurrency exchange Coinbase Global (COIN -0.27%) has a cost problem, and an initial round of layoffs in June wasn't nearly enough to solve it.
The company minted astounding profits during the cryptocurrency boom in 2021, which prompted a vast expansion of its workforce and its cost base. On $7.8 billion of revenue in that year, Coinbase booked operating expenses of $4.8 billion and a net income of $3.6 billion. All those numbers were up dramatically from 2020. Operating expenses rose more than fivefold.
The problem is that charging hefty fees to trade digital tokens that have no real-world uses or intrinsic value only works when enough people think they can make a profit trading those tokens. Far fewer people think that now. Cryptocurrency prices have crashed, and scandals like the collapse of FTX have destroyed confidence in the crypto economy.
Coinbase's revenue has fallen off a cliff as its customers have pulled back hard. Through the first nine months of 2022, the company generated just $2.6 billion of revenue, down by about 50% year over year. Costs have continued to explode. Operating expenses totaled $4.7 billion during that nine-month period, up roughly 50% year over year.
Round two
After firing 18% of its workforce in June, Coinbase is now letting another 20% of its workforce go in an effort to reduce its cost base. That works out to about 950 employees who will be leaving the company by the second quarter of 2023.
While the cryptocurrency market was in trouble before the collapse of FTX in November, Coinbase CEO Brian Armstrong told CNBC that the scandal and the resulting contagion had "created a black eye for the industry" and that more fraud would likely be uncovered as scrutiny on the industry increases. Coinbase is shutting down some projects that have long odds of success, and it's putting a renewed focus on operational efficiency as it looks to weather the storm.
The layoffs will generate between $149 million and $163 million of restructuring expenses, almost all of which will be incurred in the first quarter of 2023. Excluding these charges, Coinbase expects its sales, marketing, technology, development, general, and administrative expenses to be about 25% lower in the first quarter compared to the fourth quarter of 2022. A combination of layoffs and other cost-cutting initiatives will drive the decline.
One issue is that a 25% reduction in costs isn't enough. In the first nine months of 2022, Coinbase would have had to slash its operating expenses by nearly 50% to turn an operating profit. Barring a new cryptocurrency bubble, the revenue situation isn't likely to improve in 2023. Even with two rounds of layoffs, Coinbase is almost certainly going to continue to burn through cash.
An eroding balance sheet
Coinbase had $5 billion in cash, excluding custodial assets, at the end of September. That's a lot, but cash has been flying out the door at a blistering pace. Coinbase bonds are selling for around $0.50 on the dollar. To put that in perspective, used car retailer Carvana has bonds trading at $0.40 on the dollar, and that company appears to be on the cusp of a debt restructuring. In other words, bond investors are betting that Coinbase is in big trouble.
Coinbase's cash balance decreased by about $2.1 billion in the first nine months of 2022. The company's cost-cutting initiatives should help slow down the rate of cash burn, but it won't be enough to turn the tide. It's possible, and even likely in my opinion, that the current cryptocurrency downturn is not temporary. It's hard to imagine the irrational exuberance of 2020 and 2021 returning anytime soon. If that's the case, Coinbase is in a race against time to bring its costs down.
