Will Coinbase Survive Amid Crypto Chaos?
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Important takeaways
- Coinbase suspends its affiliate program in an effort to cut costs, which has been labeled by some market commentators as a “huge red flag”
- This is the latest in a series of cost-cutting measures, including layoffs of 18% of the workforce
- After the recent collapse of Three Arrows Capital, Voyager Digital and Celsius, the market is nervous about the future of companies in the crypto industry
- As a public company, Coinbase’s finances are open to the public, and for now it doesn’t look like they’re in immediate danger of experiencing a similar collapse
Recent months have seen the bankruptcies of crypto heavyweights Celsius, Three Arrows Capital (3AC) and Voyager, as well as the total collapse of large cap cryptocurrency Terra Luna and associated TerraUSD.
So, is Coinbase next?
That’s the question some are starting to ask, with rumors of a Coinbase bankruptcy starting to pick up steam. Like everyone else in the industry, Coinbase has come under pressure in 2022 due to the crash in the cryptocurrency markets.
It’s not something they’ve shied away from, and CEO Brian Armstrong announced in June that the company would lay off 18% of its workforce. In a post on the Coinbase blog, Armstrong stated that he felt a recession was likely and that a crypto winter was here.
These challenges are not unique to Coinbase, but the way they need to deal with them is. That’s because unlike Celsius, 3AC, Voyager and most other companies in the crypto space, Coinbase is a public company.
They are listed on the NASDAQ, which means they report to the SEC and have a lot more T’s to cross and I’s to dot than most other crypto companies. So with a volatile market and liquidity issues across the industry, should Coinbase investors be nervous?
The crypto backdrop
Unless you’ve been living off the web in the Himalayas for the past year, you’ll know that the crypto market has crashed through 2022. Bitcoin is down over 40%, Ethereum is down over 50%, and many other coins and tokens are down even more.
These massive falls have created major liquidity problems for companies built to use crypto as collateral and working capital. 3AC was the first major domino to fall. The crypto hedge fund, which at one point managed up to $10 billion in assets, was placed into liquidation by a court in the British Virgin Islands after failing to meet margin requirements.
3AC borrowed money from many different places and their bankruptcy caused a contagion effect to other companies, most notably crypto lender Voyager Digital which owed $670 million. 3AC’s default on this debt forced Voyager itself into Chapter 11 bankruptcy.
Other companies affected by the collapse of 3AC include Genesis, BitMEX, Blockfi and FTX.
It is a similar story for the DeFi platform Celsius, which stopped all withdrawals and transfers on the platform on June 12. Speculation ran wild about what this would mean for depositors, with those fears confirmed when Celsius announced it was filing for Chapter 11 bankruptcy earlier this week.
These problems are caused by a couple of different factors. The first is simply that the company’s balance sheet has been hammered due to the falling crypto prices. The second is liquidity issues, with customers looking to pull their money out of crypto into safer assets as a result of extremely high levels of volatility.
Even for companies that are well capitalized and with strong cash reserves, the market environment has made things difficult, and Coinbase is not the only crypto company to lay off employees. Gemini has announced a 10% reduction in staff, BlockFi by 20%, Crypto.com by 5% and NFT marketplace OpenSea is also cutting 20% of its staff.
Coinbase Stops Affiliate Program
All of this has wreaked havoc on Coinbase’s share price, which is down over 70% so far this year. But it is recent cost-cutting by the company that has sent the rumor books into overdrive.
Coinbase seems to be focusing heavily on reducing costs right now. The layoffs are the most obvious example, but they also announced in June that they would shut down Coinbase Pro, an advanced platform designed for professional and high-volume traders.
The move would see existing users transferred to the standard Coinbase platform, which has been beefed up with advanced features in a bid to capture a wider segment of the market. In isolation, this seems like a pretty sensible move, but combined with the other changes being made, it’s clear that Coinbase is looking hard for ways to reduce overhead.
However, the big news this week is that Coinbase has suspended their affiliate program in the US
Affiliate programs are a common marketing strategy used by almost every industry in the world and it is one of the main sources of income for content creators and influencers. The programs work by providing content creators with a unique link, which they can then include in their content.
When someone uses the link to sign up for a service or purchase a product, the creator receives a commission or fee for referring the customer to the business.
The financial industry’s affiliate programs can be particularly lucrative for content creators. As late as early 2022, Coinbase affiliates were paid up to $40 for each new signup they generated through their content.
As part of their recent cost-cutting measures, Coinbase cut commissions on new signups in April, reducing them from $40 down to as low as $2 before suspending the program entirely this week.
Affiliate programs can be a very effective way to get new customers, but in an environment where prices are low and volatility is high, these new customers may not be as active as those acquired during a bull market. Given that it costs Coinbase real money in affiliate commission every time they add a new customer, they have decided that this cost needs to go away for the time being at least.
Coinbase has said it plans to bring the program back in 2023, but it hasn’t given a concrete date for exactly when it expects it to be reinstated.
Some commentators have signaled this decision as a “huge red flag” and raised concerns about the future of Coinbase. It is reasonable for investors to be wary of a company operating in the notoriously volatile crypto industry, at a time when prices have crashed. However, there is a big difference between Coinbase and the other big names that have recently gone bankrupt.
Coinbase’s obligations as a public company
Coinbase is a publicly traded company, which means that from a financial point of view they are an open book. There are strict disclosure requirements for public companies, which allows investors to see the financial health of the business down to the penny.
This is very different from the situation with 3AC, Celsius and Voyager Digital. These companies have no disclosure requirements. Customers have no way of knowing the financial health of the company, and the people running them have no obligation to provide any details or context about the health of the business.
Looking at Coinbase’s finances at the end of March 2022, there are a number of details worth pointing out. First, the company currently has over $6 billion in cash and net income of $2.4 billion over the last 12 months. This revenue figure is lower than the previous quarter, which is to be expected given that trading volumes have fallen significantly since the end of 2021.
In isolation, these numbers don’t give investors much of an idea of how financially secure Coinbase is, but it’s possible to use the numbers provided to use financial ratios designed to assess the financial health of a company.
The current ratio looks at a company’s ability to pay its short-term debt with its readily available assets, such as cash. If a company has a current ratio of less than 1.00, it means they don’t have enough liquid assets to clear their debt, and if they have a ratio above 1.00, it means they have enough to remain solvent at short term.
Currently, Coinbase has a current ratio of 1.6, which suggests that they are in a comfortable position relative to their current liabilities and assets. This is not the whole picture as it is simply a snapshot of the short-term financial obligations of the company.
For a more long-term measure of a company’s solvency, looking at the ratio of debt to equity can provide guidance on the company’s debt load. Generally speaking, a debt-to-equity ratio of less than 1.00 would be considered fairly safe, as it means that for every $1 of equity, there is less than $1 of debt.
The acceptable range differs across industries, but currently Coinbase’s debt ratio is around 0.63.
To give some context to these numbers, trading platform Robinhood currently has a current ratio of 1.4 and a debt ratio of 0.32. Payments platform Block (formerly Square) has a leverage ratio of 2.00 and a leverage ratio of 0.29. PayPal
All in all, Coinbase currently appears to be a ways away from a liquidity crisis. That is not to say that this could not be changed. Revenue is down from last year, and investors will want to hear an update from the company on August 9 when it releases its Q2 financial results.
It is likely that revenues have fallen, and this is probably the reason why the company wants to cut costs in the short term.
Regulation and “red tape” are often held up in a negative light, but if the crypto industry shows us anything, it’s that this scrutiny and oversight can be very important. That’s not going to stop Coinbase from experiencing difficulties in a challenging market, but the transparency makes it much safer to deal with the company as customers and investors.
Is crypto worth investing in right now?
Crypto remains a high-risk game, and that’s not likely to change anytime soon. With that said, prices are the lowest they’ve been in a long time, and we’ve recently started to see a bit of a turnaround. There’s no way to know if this is a blip on the chart or the beginning of a long-term trend, but if you’re looking to get into crypto, there are good and bad ways to go about it.
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