Coinbase Breakout Unlikely Until the Crypto Winter Ends

The company's business model relies on speculation in cryptocurrencies

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Nov 23, 2022
Summary
  • Much like other crypto-focused businesses, Coinbase is under tremendous pressure because of the FTX bankruptcy.
  • The long crypto winter is not helping.
  • If the economy improves in 2023, Coinbase could make a comeback.
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Coinbase Global Inc. (

COIN, Financial), the largest U.S.-based cryptocurrency exchange, opened at its lowest level on record on Nov. 21 amid growing concerns about the safety of digital assets.

The company's shares have lost more than half of their value since the start of the year. The sell-off comes as the world of cryptocurrency was shaken to the core by allegations of fraud and hacking at major exchanges. FTX, one of the largest digital asset exchanges, was hit with allegations of fraud involving transactions of $10 billion, and the company was hacked for $650 million. Its bankruptcy completed an embarrassing few weeks for the company and its founder.

Binance, another major exchange, liquidated its FTT position after selling its equity investment in FTX. Coinbase has sought to distance itself from FTX, clarifying that it is a regulated institution that is nothing like the embattled exchange. However, traders' confidence has been hit, and many are moving on from all cryptocurrencies. Under these circumstances, it is no surprise that Coinbase is under pressure despite its limited association with FTX.

The crypto winter is in full force right now. It is not just the companies themselves; the whole crypto landscape has become significantly more unpredictable. Coupling that with the FTX crisis makes it clear that a comeback story for Coinbase is less than likely for the foreseeable future.

Do not expect a recovery until 2023

While the cryptocurrency market has seen some ups and downs over the past year, it is currently in a prolonged slump that has come to be known as the "crypto winter." As a result, many companies in the space are struggling to stay afloat. Coinbase is no exception. The company has laid off several employees and has been forced to shelve plans for new products and features. In addition, it has seen a significant decline in trading volume and market share. While the company is still profitable, it is unlikely to thrive in current market conditions. Coinbase may be forced to make further cuts as the crypto winter drags on.

While many factors have contributed to this slowdown, the most important one is the impact of the Russia-Ukraine war. Cryptocurrencies are still largely viewed as speculative investments and have yet to achieve widespread use as a payment method. As a result, the long crypto winter is likely to continue until the global economic situation improves. In the meantime, those invested in the industry will need to be patient and wait for better days ahead.

While it is difficult to predict when this market slump will end, several factors suggest it is closely linked to the economy's overall performance. In particular, the strong performance of the U.S. dollar relative to other currencies has made crypto assets less attractive to investors. However, suppose the economy will improve in the coming year. This could boost the crypto market as investors will have more disposable income to invest or trade with cryptocurrencies. Until then, the cryptocurrency market is likely to remain under stress.

Coinbase's financials illustrate its problems

Due to the prevailing situation, Coinbase finds itself between a rock and a hard place. On the one hand, revenues are drying up because of less crypto trading. At the same time, it is forced to cut expansion plans and focus on curbing costs.

During the third quarter, Coinbase's revenue decreased by 53%, resulting in a group net loss of $545 million. The company brought in only 8.5 million monthly transacting users for the quarter, compared to 9 million in the prior quarter, though up from analysts' estimates of 7.84 million. Meanwhile, the platform's assets grew 5% from the second quarter to $101 billion, driven mostly by net inflows and a crypto price boost near the end of the quarter.

In light of the economic crisis, Coinbase had to let go of 18% of its employees. The company has reiterated plans to make sure it reaches its goal of no more than $500 million of adjusted Ebitda loss year within the year.

Coinbase also recently announced a partnership with Alphabet Inc.'s (

GOOG, Financial) Google, enabling various Google cloud service users to pay through cryptocurrencies via Coinbase. Meanwhile, Coinbase's cloud nodes will be moved from Amazon's (AMZN, Financial) Amazon Web Services to Google.

The company is moving in the right direction by focusing on institutional clients. To top things off, it partnered with BlackRock (

BLK, Financial), one of the largest asset management firms. The alliance allows Aladdin to provide crypto trading, custody and other services such as prime brokerage and bespoke reporting. We need to consider many variables before reaching conclusions, but this is likely a good move for improving the bottom line and profitability.

Takeaway

Although Coinbase is often considered a reliable way to buy and sell cryptocurrencies, the current situation is volatile. The prices of bitcoin, Ethereum and other cryptocurrencies have been fluctuating rapidly, and Coinbase has struggled to keep up.

In addition, the FTX debacle continues to weigh heavily on the stock. As a result, many experts believe now is not the time to invest in Coinbase. It is unclear how the situation will develop and the stock may rebound, but given the current risks, it is advisable to exercise caution before investing.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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