There was not much to cheer about in Coinbase’s first quarter earnings for 2022 yesterday. If anything, they provided more proof of the pain in crypto markets. North America’s biggest cryptocurrency exchange by trading volume reported losses and a revenue decline of more than a billion dollars in its latest earnings period.
The exchange, among the pioneers of crypto industry, has previously benefitted from a surge in crypto market valuations. But a prolonged winter has wreaked havoc on them and cast harsh regulatory spotlight on its workings. In that sense, Coinbase’s earnings have become a bellwether of the state of affairs in the crypto ecosystem, which is undergoing a similar set of crises.
A Dire Condition
For the first quarter of 2022, the company reported revenues of $808 million, down from $2.2 billion during the same period last year. Its losses were $430 million, a reversal from profits of $830 million a year ago. Declines in those figures reflected the 44% yearly decline in trading volumes to $309 billion. The company’s losses per share (EPS) were $6.42, below analyst expectations of $2.47 per share. Its shares fell by almost 11% in after hours trading. As of this writing, they are trading at $93.11, up almost 6% from the day’s start.
Both institutional and retail trading volumes on Coinbase fell by 37% and 58% respectively in the last quarter after most investors cashed out in the final quarter of 2021. The net effect of these declines was that transaction revenue fell 56% to $1.2 billion.
In the crypto frenzy of 2017, Coinbase was among the most selective of exchanges and had listed only four tokens on its exchange. In recent times, the San Francisco company has dramatically increased its intake of new coins to compete with the likes of Binance, the world’s biggest cryptocurrency exchange by trading volume. For example, at the end of May, it had 172 assets available for trading. While that strategy boosts transaction fees (and revenue) from users, it can also go the other way as asset price declines. In its most recent quarter, Coinbase’s asset impairment charges jumped by 252% from a year ago to $259 million.
A growing list of controversies and mishaps has further added to the company’s current dire condition. For example, three of its former employees were recently booked for insider trading. The Securities and Exchange Commission (SEC) has added to the pressure in its formal complaint by claiming that the exchange is offering unlisted securities to users.
Its forays into new products and services have been less than successful. For example, its non-fungible tokens marketplace received a mild reception, when it was launched in April. An even bigger mishap occurred internationally, when the company’s launch in India ran into rough weather after the National Payments Corporation of India halted its plan to offer fiat-to-crypto services through the country’s Unified Payments Interface (UPI).
Thus, the exchange’s users in India are restricted to trading between crypto pairs instead of buying them using fiat currencies. During its earnings call yesterday, Coinbase CEO Brian Armstrong attributed the mishap to “informal pressure” from the Reserve Bank of India. “…my hope is that we will [be] live back in India in relatively short order along with a number of other countries where we’re pursuing international expansion similarly,” he said.
For the rest of this year, the company has forecast more gloomy weather, with further declines in trading volumes and transaction fees. The average revenue per user (ARPU), which hovered in the mid-30s range during good times, will decline to $25.
Coinbase and Google
It is to Coinbase’s credit that it has not attempted to window dress the earnings decline or the crypto industry’s inherent volatility. In large part, this is because the company has ambitions to become a Google of the crypto industry, meaning it wants to become a conglomerate that funds businesses and grows the industry. Therefore, it is imperative that its investors understand the long term nature of their investment.
But Google had the cushion of increasing revenues and profits to grow into the outfit that it is today. Crypto’s halting lurch into mainstream trading has made it difficult to predict its success curve with certainty. An extended crypto winter could translate into more losses and stymie Coinbase’s losses.
At the end of this quarter, the company had $6.1 billion in cash and more than a billion dollars worth of cryptocurrencies on its balance sheet. That amounts to roughly a third of its current market cap. In the coming quarter, the company says it will focus on investments to build new products and services for its customers. It has already ramped up its employee headcount by 33% from the last quarter to 4,948 personnel.