Problems at Coinbase (COIN)
Coinbase (NASDAQ: COIN — $17.7 billion) is the largest cryptocurrency platform in the U.S. and is on a mission to “increase economic freedom in the world.” The company lost over $1 billion last quarter and recently warned that “in the event of a bankruptcy customers could be treated as our general unsecured creditors.” Intense competition, a busted business model, and failing leadership tether the company to a downward trajectory. Let’s dig in.
Founded in 2012 as a project for Y Combinator, Coinbase is a remote-first company that now employs around 5,000 people and disclosed having nine million monthly active users in its last quarter. Coinbase makes money primarily from above-market trading commissions of up to 0.6% per trade. The company grew rapidly during the pandemic with revenue up 144% in 2020 and 515% in 2021 but reported revenue down around 60% in recent quarters driven by a weakening crypto market and intensifying competition.
For example, investors looking to trade cryptocurrencies can do so on Robinhood, Square, PayPal, Gemini, SoFi, WeBull, eToro, Binance, Public.com, Crypto.com, and FTX, among others. Two days ago, Schwab, Citadel Securities, Fidelity’s Digital Asset division, and Virtu Financial formed EDX Markets, a new crypto exchange. On Monday, the Wall Street Journal reported that Fidelity is looking into adding Bitcoin trading for its 34 million brokerage accounts. Because many of Coinbase’s new competitors have services beyond cryptocurrency trading (e.g., stock trading), they can offer crypto trading at no cost as a loss leader to attract new users. This makes Coinbase’s industry-high fees look unsustainable. Moreover, many new entrants are willing to advertise heavily to gain an edge over Coinbase; Crypto.com bought the right to Staples Center and launched viral ads with Matt Damon and has fees for low-dollar trades ~75% lower than Coinbase.
One of the best-funded competitors, FTX, has also set its sights on Coinbase. In an October 2021 podcast interview FTX CEO Sam Bankman-Fried commented on their competitive dynamics:
“So name recognition certainly matters. And we're way behind on that. Versus for instance, Coinbase, we have about four times their daily trading volume and about 3% of their user base. So it's a factor of 100 difference in volume per user. They have done spectacularly at the long tail retail consumer, and we have done much better at the more sophisticated, more highly engaged users who trade larger volume each. But the other thing that matters, I sort of split out marketing into name recognition and brand. One thing that I think about with our marketing is, how do we get as many people as possible to have heard of us?” (56:20)
Since the podcast, FTX has “led crypto’s takeover of sports,” launched viral ad campaigns with Tom Brady, and last week announced a partnership with GameStop “to introduce more GameStop customers to FTX’s community.” The GameStop partnership will include GameStop carrying FTX gift cards in a clear push to gain Coinbase’s target demographics of retail traders. FTX fees are up to ~90% lower than Coinbase too.
Coinbase’s ability to attract and retain users despite intense competition is a task left to its CEO, founder, and controlling shareholder Brian Armstrong. Mr. Armstrong, 39 years old, has over one million followers on his Twitter and is frequently in the media.