I was wrong; Coinbase Global is NOT a good buy.
Three months ago I wrote an article entitled (Totally Not Financial Advice But CoinBase Has Strong Buy Signals Right Now) I was wrong.
At the time, CoinBase [COIN: NASDAQ] was trading at $176.83 but is now at $75.32. That is a drop of -57%. I am sorry to whomever I may have mislead. In total it is down -78% since listing in April 2021.
In three months the tides have changed dramatically. In my initial post, I stated that CB had 1,249 employees in 2020, 3700+ in 2022, and was projected to have 6000+ by 2023 - but just last week, a pair of internal emails said CB is pausing new business projects, freezing hiring for two weeks, and is aiming to slash its cloud spending on Amazon Web Services. Bad news.
It recently came out that four top Coinbase officials collectively made over $1B selling shares since public listing last spring; during that time, the company’s shares declined some 80%. Fred Ehrsam (co-founder) offloaded around $500 million, Brian Armstrong (founder) sold around $292 million, while Choi and Chatterjee sold $226 million and $110 million. They have always been selling shares, around prices between $189 to $422. Bad news.
Coinbase earnings for 2022Q1 was $1.17 billion—short the $2.5 billion it took in 2021Q4, and far below predictions of $1.5 billion. At the same time, CB posted a quarterly loss of $430 million. Its first lost as a public company was also unexpected - analysts had predicted earnings would be close to breakeven. The word ‘down’ is on half of the pages in their Coinbase-Q1.2022-Shareholder-Letter.pdf - Bad news.
Trading volume on CB was $309B in Q1, short the $331.2B predicted - volume of trades was down 39% from $547B in Q4 of 2021 (when crypto prices were at all-time highs). CB’s business model hinges heavily on crypto trading and taking trading rates, so the down market/crypto winter hurt its earnings. Bad news.
It also came out this month, that although CB is the leading cryptocurrency exchange platform in the United States, it has a particular risk disclosure, that if the company were to file for bankruptcy, courts my treat customer assets the exchange custodians – i.e., customers Bitcoin, Dogecoin or whatever - as Coinbase assets - and they’d be used for repayment, forcing normal people to have to fight for their ‘money’ back along with everybody else owed money by the company - and we all know VC’s come first. Bad news.
CB co-founder Fred Ehrsam (one of the executives involved in selling part of that 1B in shares^) and other investors like Cathie Wood are currently 'buying the dip'. Wood grabbing 546,579 shares worth $2.9 million and Fred buying $75M worth. Ah, Fred, selling $500m worth of his own company stock early after listing to enrich himself and then getting good PR for buying back $75M (15%). I do not care that Fred’s purchase was “on behalf of his investment firm” Paradigm, still feels scummy. “It’s normal for early investors to sell off portions of their holdings when a company undergoes a direct listing”, says the WSJ. YEAH, sure. Analysts do not even know if these people are really buying the dip or just catching a falling knife. Bad news.
Earlier this month, a group of CB users took the company to court demanding compensation for losses on crypto assets they claimed were securities. The group is demanding reimbursement for trading fees and market losses while also seeking to prevent the assets from continuing to be traded on CB. These include XRP, Cardano, Solana, and Dogecoin. CB responded with a motion to dismiss the class-action lawsuit - claiming 79 of the tokens listed on its platform were unregistered securities, stating, “If successful, plaintiffs would have this court effectively freeze the accounts of innocent [CB] users who, by their own choice, transact with one another in these tokens……Other digital asset trading platforms would likely be compelled to do the same.” The CB lawyers are arguing CB brings together buyers and sellers of cryptocurrencies, rather than transacting directly with users, so CB would not be liable as a seller even if the assets on its platform were to be deemed securities- while also saying the cryptocurrencies in question are not securities. - In an email response about the lawsuit, a CB spokesman said “this highlights the need for transparency, public-facing analysis and clear guidance from the SEC.” - pretty much pushing the problem back onto the regulators instead of tackling the issue themselves. Whatever keeps making them millions, I guess. Bad news.
While some say the market may not be correctly pricing CB’s new NFT platform - on its first day the marketplace saw fewer than 150 new users make a trade and garnered only $75,000 in ETH – Since opening the number of CB NFT users has fallen every day - the NFT market as a whole is down 92% since September – and last month the total CB NFT trade volume only reached $668,668 sales across a small pool of 1,287 users. – Bad news.
SOME good news –
1) Coinbase Global ‘made history’ recently when it became the first cryptocurrency company to break into the Fortune 500.
2) On May 20, CB announced the termination of support for Terra and all future Terra chains.
3) Coinbase Ventures may be undervalued, as it has 250+ VC investments in pivotal tech and companies in the crypto industry.
4) Coinbase is getting into a position to offer crypto derivatives, AND testing a new subscription service called "Coinbase One," offering users zero-commission trading for a flat monthly fee.
5) They are adding access to “thousands of tokens,” which constitute a “greater variety than most traditional centralized exchanges can offer.”
I will reevaluate this stock in 3-4 months’ time. Until then, I am watching it fall with a smile like amusement park attendees on Splash Mountain.