Why are Coinbase (COIN) stocks falling this month?

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Shares of Coinbase (NASDAQ:COIN) are trading lower in June to reflect a bloodbath in the cryptocurrency market.

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Layoffs needed to mitigate decline in revenue

Earlier this month, Coinbase announced plans to cut its workforce by 18%, or about 1,100 employees, making it the latest of several crypto exchanges that have recently cut jobs.

In the company’s blog post, CEO Brian Armstrong cited recession fears, saying it could lead to “another crypto winter” and stay for a long time. Armstrong reflected on the precipitous drop in trading revenue in previous crypto winters and that is why the crypto exchange must plan for the worst in order to keep its business alive.

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The company, which currently has nearly 100 million users and $256 billion in assets on its platform, is looking to complete the layoffs by the end of this month. Coinbase will spend between $40 million and $45 million to pay for staff severance and other severance payments.

Armstrong said Coinbase had to downsize because it hired too many people in a short period of time. The company currently has about 5,000 employees, down from just 1,250 last year, Armstrong added.

Why now?

Downsizing is one of the latest in a series of challenges Coinbase has faced this year. The crypto exchange posted a loss of $430 million in the first quarter last month as the number of monthly active users fell 19%.

Additionally, the company also recently announced that it was suspending hiring and canceling several job postings due to market conditions and “business prioritization efforts.”

After the crypto boom last year, Coinbase ramped up its hiring pace and its executives had to figure out how many new employees were needed to keep up with the boom.

“While we did our best to make it perfect, in this case it’s now clear to me that we’ve over-hired,” Armstrong said.

The layoffs in the crypto industry come amid a strong selloff in 2022, with Bitcoin and Ethereum plunging over 50% and 65% year-to-date, respectfully. Indeed, investors are moving away from riskier assets as inflation hovers around its highest level in over 40 years and global central banks continue to raise interest rates to rein in rising costs.

The total value of the crypto market fell below $1 trillion this month, marking the first time it has fallen below that level since January of last year.

Other crypto companies, including Crypto.com and Gemini Trust, have also announced layoffs in recent weeks. Crypto.com plans to cut around 5% of its workforce, while Gemini said it will cut around 10%, marking the first time the company has reduced its workforce.

Mizuho Securities analyst Dan Dolev noted that recent trading patterns on Coinbase suggest potential crypto exhaustion. According to Dolev, the average trading volume on the Coinbase platform on Bitcoin down days increased by 15% compared to days when the cryptocurrency was in the green.

However, that number has nearly tripled in recent months, with down-day volumes up around 42% more than up-days.

He also warned investors not to get too excited about the late surge in trading volume at the start of the month, as the upside “seems to be fading…COIN is still trailing 10-15% below the 2Q consensus and ~30% below 1Q level,” he added.

The competition intensifies

In another blow to Coinbase, Binance.US has announced that it is reducing its spot Bitcoin trading fees. Binance.US, the partner platform of the world’s largest cryptocurrency exchange, Binance, said it will allow customers to exchange USD, USDT, USD Coin and Binance USD for bitcoin spot without fees .

The crypto market has had a very difficult year as investors continue to offload risky assets due to record inflation and geopolitical tensions. Bitcoin fell to a new low in 2022 when it broke south of $18,000, the first time it has touched this level in a year and a half.

Trading volumes, which have been a major revenue driver for Coinbase, also fell sharply following the sale. The crypto exchange has started testing a new subscription service dubbed Coinbase One, which is expected to allow customers to trade up to $10,000 per month without any fees.

Crypto and exchange rival Robinhood was the first to launch a no-fee trading service, which has weighed on retail investing over the past few years as some of the biggest brokers such as Interactive Brokers, Charles Schwab, Fidelity Investments and E*Trade Financial also switched to commission-free investing.

This has also been a headwind that the crypto industry has faced as an increasing number of trading platforms decide to combine crypto and stock trading. In May, the FTX US cryptocurrency exchange announced plans to launch commission-free stock trading. On the other hand, the TradeStation platform, which started as a stock trading platform, now also focuses more on crypto trading services.

Discontinuation of Coinbase Pro

Coinbase will shut down its professional crypto trading platform Coinbase Pro later this year as the company continues to add more advanced investing features to its regular platform.

The company said the platform forces its customers to “rely on Coinbase Pro and Coinbase.com for overlapping feature sets, and often encounters friction when transferring balances between the two products.”

“To resolve these frictions and provide customers with the best of both worlds, we’ve rebuilt the full Coinbase Pro advanced trading experience in the Coinbase mobile app and Coinbase.com. As we continue to add more features to Advanced Trade on Coinbase, we will be ending Coinbase Pro later this year,” he said.

Coinbase Pro’s move marks another move by the crypto company to cut costs as it seeks to survive the “crypto winter.”

Summary

Coinbase’s stock trading declined this month as crypto prices, along with declining trading volumes, continue to hurt the company’s financial profile. Coinbase has announced a series of measures to drive down costs as investors wait for better prospects for the crypto market before stepping back on the sidelines.

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