Crypto Winter is Brutal


  • Intro - Coinbase
  • Crypto Exchange Universe
  • Business Overview
  • Bulls
  • Bears
  • Catalysts
  • Key Metrics
  • Conclusion


You can’t think “Bitcoin” without “I need to buy more at Coinbase” crossing your mind immediately afterwards.


Coinbase and Bitcoin are essentially synonymous today. Most investors either know what Bitcoin is or can trade Bitcoin because of Coinbase.

And lately, with the extremely cold crypto winter we have been experiencing – wouldn’t it be nice to look a little deeper at Coinbase? Can they weather this storm? Is the stock price forever tied to the price of BTC?

Let’s jump in!

Crypto Exchange Universe

Cryptocurrency has been the talk of the town for most of the last 18 months. It’s become more than mainstream, it’s the only stream now.

We spent some time reviewing Crypto in a prior Insiders so we won’t spend too much time trying to explain cryptocurrency itself.

Instead, let’s look at crypto exchanges to better understand the space that Coinbase operates within. Just like stocks are traded on centralized exchanges (NYSE, AMEX, FTSE) cryptocurrencies can be traded on exchanges as well.

Exchanges are centralized entities that allow for greater access to trading assets for the retail client. We can all agree that most of us would have a hard time figuring out how to trade cryptocurrency on its native blockchain if it weren’t for the retail exchanges that make it as easy as ordering a 2nd lunch from DoorDash. (Not all of us were born engineers!)

Coinbase (and other exchanges, like FTX,, Blockfi, Gemini, etc) have created a user experience that makes trading cryptocurrency feel as easy as trading stocks. Anyone who has ever placed a trade on their Schwab account (the one their mom set up for them) knows that it’s almost too easy to buy that 3x inverse real estate ETF. 

It’s just as easy to buy Bitcoin or Polygon or any of the 100+ listed tokens on Coinbase, as well.


Since the dawn of crypto (aka 2009), we have seen numerous crypto exchanges pop up, explode and fade away. Interestingly, the ones that appear to have the strongest position end up with one pivotal problem: they get hacked.

Look at, who made the infamous Matt Damon ad about seizing opportunity and being brave when buying crypto (which literally turned out to be the very top).

They even went as far as buying the naming rights for a stadium. Shout out, Arena in LA! (Terrible name)

But, unfortunately for them, after spending all this ad and stadium-naming money, they ended up getting hacked.

In the grand scheme of things, the hack was relatively small. $30m was stolen from ~500 accounts and the funds were reimbursed to clients.

The bigger impact was on their brand: a hack shows security concerns, the most important thing in the mind of any crypto investor.

Once security is compromised, fear opens the door for customers to leave and raises the bridge for new customers to cross the moat.

Bottom line: security is of the utmost importance in crypto. If an exchange loses that security credibility, you can expect large outflows.

Still, today, even as one of the oldest exchanges, Coinbase has never experienced a hack.

Coinbase – Business Overview 


Coinbase, as an exchange, derives its revenue from trading fees. These fees range from a fixed dollar amount for smaller trades, to percentages with breakpoints for larger trades. In fact, trading revenue accounts for 87% of total revenue. And of that transaction revenue, 95% comes from retail traders (i.e. you and me!)


When trading volume is high, revenues are high. When trading volume falls… well, you can see from the snip above. Revenue falls by 35%.

Unfortunately for Coinbase, when revenue falls – expenses usually do not follow suit. In fact, when compared to Q1 of 2021, operating expenses jumped by 111%.


It is not a negligent spending though. With the staggering increase of interest in crypto in 2021, Coinbase needed to expand their operations immensely to keep up with the demand. They hired more employees, built out the platform and acquired small competitors who were doing meaningful work.

All of this spending makes sense in an environment where prices are headed to the moon and trading volume is immense. But when trading falters and prices fall through the floor, this kind of spending can be hurtful.

Near term, and in the middle of a severe crypto winter, hearing that revenue is the driver for profitability for Coinbase can be a little concerning. Especially when revenue seems to be highly reliant on high prices for crypto - and we haven’t seen any high prices for months now!


Cracks have been forming for Coinbase this year, but one of the biggest seems to be the new SEC legislation requiring exchanges to spell out clearly which party is responsible for the safeguarding of crypto-assets. 

This brought to light the fact that in bankruptcy proceedings, retail clients’ assets would be susceptible to asset seizure by Coinbase creditors.

The reason for this also explains how Coinbase is able to settle trades for retail clients so quickly: Coinbase acts as principal in all retail trades. This means that when you go and place a trade on Coinbase’s platform, you are purchasing an asset that Coinbase holds in its inventory at market prices.

There are a host of benefits associated with this: instant trade settlement, no bid-ask spread, no frontrunning concerns (if you’re a whale). The instant trade settlement is pretty great, especially in an asset class that would normally take a few minutes to settle on-chain.

The downside to this should also be clear: retail traders are “purchasing” assets from Coinbase’s inventory but the asset is never really changing hands. It lives in Coinbase’s inventory until traders transfer it to their own wallet or another exchange.

It makes a little more sense now why creditors would be able to seize those assets – they are still technically in Coinbase’s name!


Coinbase is responsible for safeguarding those assets on their books, even though the book entry might say “Short Squeez YOLO plays.”

This brought a lot of flack to Coinbase and Brian Armstrong replied on Twitter letting everyone know that they would work on changing this. But once retail traders realized they didn’t own the assets they were purchasing on Coinbase, things started to change for them.


At this point, the main scenario that will drive Coinbase back to pre ‘22 highs is going to be increased prices in crypto. When investors are scrambling to buy more crypto, they are most often climbing over one another to do that on Coinbase.

While there are some that believe some tokens will rocket back up in price this year (looking at you, ETH-Merge!), most traders do not see an end to this crypto winter in sight. And without a shift in business model, Coinbase seems doomed to falter as prices stay flat or continue falling.

Coinbase also maintains its position as one of the only major exchanges to avoid any sort of hacking scandal. That may not seem too impressive (since it should be the standard) but in today’s atmosphere, that fact still goes a long way towards future potential.


Coinbase has laid off 18% of its workforce in the last month, with a focus on their new policy to break even, rather than turning a profit. 

The main driver of these layoffs seems to be the immense fall in crypto prices for the first half of the year. For a firm that is entirely reliant on trading volume and fees to run the business, when prices fall and investors aren’t trading to gain that next great win… revenue sources dry up very quickly.

Competitors are popping up left and right to undercut Coinbase on fees, trading volume, access to certain crypto-assets and more.

Think of crypto like early stage social media companies. Back in the day, there was just Facebook (Meta). You either had Facebook (Meta) or you used some knock-off, old school platform like MySpace. But then, new entrants started showing up – Snapchat, Instagram, Twitter. Facebook (Meta) was hurt (initially) by the rise of new entrants to the game.

Facebook (Meta) went from owning 99% of the market share (I’ll give you 1% MySpace, because I feel bad for you) to owning much less. 60% maybe? 

The point is not the number, but the fact that they gave up market share because of innovation and things like 160 character tweets, or mainly pictures with much less words, or even just pictures that disappeared in 10 seconds.

Coinbase is experiencing a similar scenario: much of crypto is still in its infancy and retail investors were initially only comfortable with exchanges like Coinbase. Coinbase makes it so incredibly easy to buy and sell cryptocurrency.

But competitors have caught on. Things are starting to shift a little bit. Exchanges like FTX, Binance, or Kraken are gaining market share. It’s no longer just the Coinbase show, there are new characters coming on stage and people are interested in what they are doing.

Why are traders switching to other exchanges? Fees.

While Coinbase is the simplest exchange (seriously, my grandma set up an account by herself) it also happens to be the most expensive. And for regular traders, this puts a black mark on the pristine record of Coinbase.

<Seriously – you’re going to charge me to transfer my ETH from my account to my wallet?!>

This doesn’t feel like a death knell for Coinbase, just like Facebook (Meta) is still around today, but it does mean that they will need to work hard to differentiate themselves from the competition even more. And being entirely reliant on trading volume may not be the best business model going forward…

Brian Armstrong, CEO of Coinbase, currently holds 59.5% of voting power of the firm. When Coinbase went public, they created two share classes, A & B, with B receiving 20 votes per share and A receiving only 1.

Brian owns nearly 70% of all Class B common stock, which means he alone has nearly 60% of all voting power of the firm.


This is a significant risk for the firm – if Brian wants to shift anything in the firm, he has that ability and voting power to do so. This could provide a significant issue down the road if opportunities arise that may be beneficial for Brian but maybe not Coinbase as a firm.


The biggest catalyst for Coinbase is the broader cryptocurrency market. 

We saw it in 2021, as prices rose, Coinbase’s revenue rose in tandem. Everyone felt that FOMO twitch and jumped on the crypto train.

Raise your hand if you bought BTC in the $50k’s? Or, ETH above $3.5k? 😔 



It’s okay – this is a safe place!

But when prices dropped and your parents started calling to say “WTF! You said ETH could only go up from here! What was all that #$@%$ about a “merge” and “proof-of-stake?” 

Coinbase felt that pain too.

Similar to any commodity-centric company, Coinbase is beholden to the price of certain cryptocurrencies. If you are long-term bullish on crypto, then Coinbase may be a good hold for you.

Coinbase, at one time, held the title of largest crypto holder and exchange – but they were recently dethroned. Binance has surpassed Coinbase as one of the largest bitcoin holdings among exchanges.

This actually makes total sense given the recent news cycle:



Key Metrics (as of 7/20/22)

  • Current Price: $73.28
  • NTM Metrics:
    • EV/Sales: 3.4x
    • EV/EBITDA: NA (negative earnings expected for 2022)
    • Price/Book: 3.1x
    • Price/Earnings: 115.2x
  • Cash Flow from Operations: ($729m)
  • Cash on hand: $6.3bn
  • Run rate: 8.6 quarters


Coinbase, like our nagging parents asking why crypto continues to perform horribly, is not going anywhere in the near future. But, like so many of the companies that went public last year, they are getting hit hard.

In bear markets, investors often take a little more time to analyze their company selections – scrutinizing the future potential of each before making an investment decision. Now that more investors are digging into Coinbase and asking more questions, they are starting to feel less confident in the future here.

It’s not necessarily a firm we need to call in the short sellers on, but it doesn’t appear to be the skyrocket that many had estimated it to be during the crypto bull run of 2021. Keep an eye on crypto markets and the price of Bitcoin and you can have a decent idea of how Coinbase is fairing overall.

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