Coinbase shares plunge by 84% to $55 apiece

Coinbase (NASDAQ: COIN) has delivered disappointing Q1 results, as the world’s most popular cryptocurrency Bitcoin falls below the symbolic $30,000 level.

Coinbase share price: Q1 results

Coinbase’s revenue fell 27% year-over-year to $1.17 billion, far below the $1.48 billion Refinitiv average analyst forecast. Overall, it made a net loss of $429.7 million, or $1.98 per share, compared to a net income of $387.7 million, or $3.05 a share in Q1 2021.

Overall operating expenses increased by nearly 70% in just six months to $1.72 billion and were more than revenue for the first time since the company launched its IPO in April last year. Strikingly, general and administrative expenses shot up by 39% to $414 million.

Coinbase argued its expenses reflect its increased headcount, ‘to strengthen and scale our customer support, legal, compliance, and business support functions.’ President and COO Emily Choi noted the importance of compliance investment as it helps to ‘solidify our relationship with our customers and regulators.’

Retail clients are abandoning the company, with retail monthly transactions users falling by 2.2 million to 9.2 million, while retail trading volume fell by 38% to $74 billion. And while institutional trading grew by 9% to $235 billion mirroring the wider mainstream acceptance of crypto as a valid investment, total trading volume fell from $547 billion in Q4 2021 to $309 billion.

However, Coinbase seems unphased by the falling numbers. It has previously warned investors to expect a rollercoaster, due to the underlying volatility of cryptocurrency. And it noted that ‘these market conditions are not permanent, and we remain focused on the long-term.’

Specifically, it’s concentrating on the next generation of crypto to further growth. Coinbase said that ‘while we continue to invest and enhance our core investment platform, the application era of crypto is upon us, led by NFDs and decentralized finance, and we are increasingly focusing our efforts on these market opportunities.’

CFO Alesia Haas elaborated that Coinbase is sacrificing increased profitability now to pursue a long-term high-growth model for the future.

Where next for Coinbase shares?

Bitcoin accounted for 24% of Coinbase’s trading volume, up from 16% in Q4 2021, but down from 39% a year earlier. Having halved in value since November, the flagship cryptocurrency remains a target for governments and regulators seeking to tighten unregulated digital assets.

Most recently, Coinbase was forced to exit India just three days after launching on 7 April. Armstrong blamed ‘informal pressure from the Reserve Bank of India…behind the scenes to try to disable some of these payments.’

The Reserve Bank’s cryptocurrency ban was overturned by India’s Supreme Court two years ago, and the CEO noted that it may ‘be actually in violation of the Supreme Court ruling.’ However, he signalled ‘our preference is really just to work with them and focus on relaunching.’

More positively, 54% of Coinbase’s users are ‘doing something other than crypto trading.’ Despite seeing only $75,000 transaction volume across 150 transactions on the first day of trading on its NFT marketplace, Armstrong thinks ‘there’s a lot to build and the opportunity in the NFT space is enormous.’

One key danger hidden was a throwaway line in Q1 results, stating ‘the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.’ In a black swan event, most retail Coinbase users would currently be classed as ‘general unsecured creditors’ with no preferential rights.

In a rapid series of tweets, Armstrong urged ‘your funds are safe at Coinbase, just as they’ve always been.’ He further informed ‘we have no risk of bankruptcy…we believe our Prime and Custody customers have strong legal protections in their terms of service that protects their assets, even in a black swan event like this,’ and said work is ongoing to afford retail customers the same protections.

However, he admitted that ‘it is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings.’ Unfortunately, this PR disaster is giving retail clients just another reason to seek the exit.

But Armstrong has enthused that ‘there are so many customers beating a path to our door that we have to have all hands on deck just to keep everything running.’ Echoing Warren Buffet, he argues Coinbase’s strategy is to be ‘greedy when others are fearful.’

And he thinks that this week’s numbers reflect that ‘the broader markets are down. We’re seeing a downmarket for growth tech stocks and risk assets, Coinbase and crypto is no exception to that.’

This leaves Coinbase a risky growth stock in an unfavourable monetary environment. Of course, adventurous investors could see Coinbase’s share price fall as an excellent entry point.