On Jan. 10, Coinbase Global (COIN -3.01%) co-founder and CEO Brian Armstrong announced that the company was aggressively cutting operating expenses, another sign of the ongoing slowdown in the cryptocurrency space. As a part of this belt-tightening, the company is letting go of 950 employees - about 20% of its workforce.
Coinbase's latest cuts underscore and are a product of the cryptocurrency's ongoing challenges. Unfortunately, there's no real clarity about when or if things will improve in the industry writ large. But what do these cuts mean for Coinbase's long-term prospects? Are these layoffs a sign of the end times or a smart readjustment that will help the company withstand the cold crypto winter?
The rise and fall of Coinbase
In 2021, Coinbase's full-year revenue jumped to $7.84 billion -- up from just $1.27 billion in the previous year. That's over 500% year-over-year growth: A mind-numbing amount, especially at such a scale. Moreover, that growth was eye-poppingly profitable at a 46% net profit margin.
At that time, though, the cryptocurrency space was on a tear. The overall cryptocurrency market cap jumped from $192 billion in 2019 to $2.3 trillion in 2021, sparking extreme interest from investors. And Coinbase was one of the best-positioned players to benefit from the surge.
But fast forward to today. Cryptocurrency's market cap has dropped from roughly $2.9 trillion at the peak to about $855 billion as of this writing, according to CoinMarketCap. Over the past year, investors have lost billions as stablecoins have, ahem, destabilized; centralized exchanges have shut down, and investors using leverage have been liquidated. Suffice it to say, confidence in crypto is rattled.
Coinbase's operating results reflect these headwinds. Net revenue from the first three quarters of 2021 was $4.85 billion; after the same period in 2022, it dipped to $2.5 billion, nearly a 48% drop. Net income looks even worse, swinging viciously from $2.8 billion during the first three quarters of 2021 to a net loss of $2.1 billion in the first three quarters of 2022.
What's more, Coinbase's trading volume has plummeted. In the third quarter of 2022, Coinbase facilitated $159 billion in crypto trades, down from $327 billion in the previous year.Smaller alternative coins have been hit particularly hard. Coinbase facilitated roughly $193 billion in altcoin trading in the third quarter of 2021. In Q3, trading volume for alt-coins was just $57 billion.
Where does Coinbase go from here?
Let's not sugarcoat this: Times are tough for Coinbase. The company already laid off about 18% of employees back in June. When announcing this week's layoffs, Armstrong acknowledged that the previous round of cuts didn't go far enough.
Coinbase is now trying to slash operating expenses by 25% quarter over quarter. The latest layoffs will cost the company $149 million to $163 million in one-time restructuring expenses, related to severance and other termination costs. That's a hefty number, but it still represents an immediate net savings. In the third quarter of 2022, Coinbase's operating expenses were over $1.1 billion. 25% savings, therefore, will save the company about $287 million quarterly.
This leads to my first takeaway: Coinbase will endure for now because of its financial position. As of Q3, the company had over $5 billion in cash and nearly $1 billion more in cryptocurrency assets. The move to cut operating expenses gives Coinbase an ongoing runway even during the dark crypto winter.
Moreover, Coinbase's bread-and-butter has been transaction fees from trading. But new revenue sources are quickly becoming more important. For example, the company enables staking for Solana and Ethereum, a growing revenue stream for the company. This staking revenue has the potential to increase, especially considering Ethereum only just recently switched to a staking protocol.
Additionally, Coinbase is experimenting and pushing innovation in the crypto space. With its latest round of layoffs, Armstrong said it was shuttering some projects with a "lower probability of success." But it'll still be looking to enable new ideas. Past experiments led to the co-creation of stablecoin USD Coin. And USD Coin's success to date is a big reason why Coinbase is now generating over $100 million in quarterly high-margin interest income.
This brings us to the second takeaway: Some parts of Coinbase's business are still growing, even amid this slowdown.
The Coinbase conundrum
It's not a satisfactory investment thesis to merely say that Coinbase is a buy because it will survive 2023. The Coinbase conundrum begs a deeper question, demanding investors to pick sides in one key debate: Does cryptocurrency even have a future?
Some would say, simply, "no". The bankruptcy of crypto-exchange FTX has drawn comparisons to Enron and is leading to greater regulatory scrutiny of the overall industry. The U.S. is discussing a Central Bank Digital Currency, which could lead to a banning of "rival" cryptocurrencies like Bitcoin.If you doubt the long-term hold of crypto and these outcomes seem likely to you, then Coinbase stock likely doesn't make sense for your portfolio.
But Armstrong is far more optimistic: He's said that "recent events will ultimately end up benefiting Coinbase greatly." To his point, Coinbase has historically embraced smart regulation. As a public company, it's also transparent about its finances, unlike some failed players.
If cryptocurrency has a bright future, then Coinbase stock may be the best way to invest. Its business model can profit from multiple possible outcomes in the space. And it's shown high cash-flow-generation potential. All this will likely make Coinbase a market-beating investment if -- and only if -- crypto winter ever gives way to springtime.
