The price action shown by Coinbase today shows the struggles the crypto firm has endured this year. According to Coinbase CEO Brian Armstrong, many factors have caused the firm’s shares to decline. In the eyes of an observer, Coinbase’s iconic status is under threat.
The shares of Coinbase Exchange are among the most volatile in the crypto space this year, recording one of the most affected large-cap stocks. On August 25, Coinbase surged as high as 0.42% at its intra-day high of 71.48 on Nasdaq, after giving up most of its August 24 gains.
The volatility puts Coinbase on shaky grounds to continue its 75% decline in 2022. Bitcoin is also experiencing the same fluctuations, recording less than half its value from barely six months ago.
According to an analyst at Goldman Sachs Inc., the extended slump in crypto prices and the wider drop in activity levels across the industry explain Coinbase’s threatened status.
Citing analyst William Nance, “We believe Coinbase will have to make significant cuts in its cost base for the company to survive the current market slump.” This comes as retail-trading activity continues to dry up. Coinbase CEO listened and acted.
Brian Armstrong, Coinbase’s Chief Executive Officer, explained the company’s plans to reduce costs, cooperate with regulators, and transition to start offering more services-oriented revenues. This would challenge the traditional mode of reliance on trading fees. So far, the wider crypto market has not responded positively to Coinbase CEO’s comments.
The Bear Case For Coinbase Exchange
Coinbase Exchange quickly climbed to become the equities market flag bearer amid 2021’s boom in crypto prices. The largest U.S. crypto exchange recorded up to $75 billion in value surge as Bitcoin made its record high.
Since then, many issues have overburdened Coinbase. Among them are the reduced revenues and trading volumes as the larger market continues to endure one of its worst sell-offs. Goldman Sachs stands among the Wall Street banks on record, advising Coinbase about its direct listing.
Equity investors have soured on Coinbase as its bonds continue to face massive pressure. According to reports, Coinbase’s senior unsecured bonds will mature by 2031, marking one of the biggest decliners in America’s high-yield market.
Increased competition from other companies is another factor that threatens Coinbase Exchange’s status. Among the firms is Binance.US, which recently announced its decision to offer zero-fee trading for Bitcoin.
Per the announcement, Binance.US will also remove fees on other tokens, followed by the termination of 18% of its staff to reduce operating expenses. According to William Nance, Coinbase has to make a rather difficult decision, choosing between shareholder dilution and significant reductions in effective employee compensation. The Goldman Sachs analyst believes such a shift would affect talent retention.
Coinbase’s bear case is a hot topic today, with the entire crypto market giving it the concern it deserves. This is visible in Coinbase’s stock price performance this year. Seemingly, investors are pricing higher risks related to regulation and fee reduction. Nonetheless, the concern remains whether enough risk is priced at the current levels.
CEO Brian Armstrong Weighs In
The exchange’s CEO Brian Armstrong, has come forward to explain the bear case for Coinbase Exchange. From his point of view, there have been several positive developments with Coinbase’s status in the eyes of regulators. Per the company CEO, the entire sector will benefit if the regulators provide more clarity.
Nonetheless, Armstrong added that if Coinbase can transition to more services-based revenues, it might be possible that trading fee reduction concerns are overhyped. Moreover, more cost reduction efforts in the short term may improve Coinbase’s balance sheet. If this happens, it would further slump because of a cash burn quarterly totaling about $1 billion.
Investors Are Concerned About Coinbase Status
Coinbase is the most popular centralized cryptocurrency exchange in the U.S. It has ridden the speculative wave of momentum the industry has experienced since 2020. In 2022, sentiment among most cryptocurrency-based investments has changed to an extremely bearish zone. The negative sentiments come as crypto prices plunged in the wave of risk-off portfolio fluctuations among many industry players.
With lower cryptocurrency prices, exchanges have seen lower trading volumes. This move has affected Coinbase and its industry peers, but creative short-sellers like Jim Chanos have pounced on Coinbase as the best idea. This is because of the possibility of fee reduction in this sector.
According to Chanos, trading fees in crypto may follow a similar trajectory. Despite embracing the transition to services-focused revenues, Chanos explains that Coinbase’s services revenues have remained somewhat flat over the past year. His general opinion is that stock is, for the most part, overvalued based on a risk-reward structure.
Other investors focus on regulatory issues linked to an SEC investigation on whether Coinbase allowed users to trade in unregulated securities. The investigation also focuses on charges of a former Coinbase executive who allegedly acted on insider information.
The two SEC cases underscore the expansive regulatory concerns among most investors. Coinbase’s Brian Armstrong insists the company is cooperating with regulators. However, it remains unclear how favorable regulators will be from now henceforth.
The SEC Investigations Are Not Helping
The case began in July when Coinbase announced the proposed hiring freeze caused by the current crypto winter. When it all started, 2022 was expected to be when the Coinbase exchange recorded new heights. It practically tripled its personnel. However, crypto prices crashing destroyed hope for these plans.
According to billionaire investor who also owns the Dallas Mavericks club, Mark Cuban, the SEC was going to be stricter on companies that fail to comply with the rules set earlier about digital currencies. In Mark Cuban’s words, “it would be a “nightmare” for the cryptocurrency industry.”
The most recent chapter on SEC versus Coinbase and the entire crypto market is on token registration. This is an extension of the insider trading case. Per the claim, the number of unregistered securities was 7, from a list of 9.
Senator Patrick Toomey disagreed with the SEC’s decision, arguing that the enforcement decision was a clear citation of the SEC being able to distinguish between securities and non-securities. The senator added that the regulator failed to reveal their opinion before announcing an enforcement decision.
Coinbase insists they have not been involved in any wrongdoing to defend itself. Per their claims, each token listed on the exchange is taken through a very thorough verification process. The company insists that it does not break any present laws set by the Securities and Exchange Commission or other agencies.
Conclusion
Coinbase seems to be standing on the cliff of what may be a very tough road to growth. It remains unclear whether the market excesses seen on the exchange during 2021’s crypto boom will manifest anytime soon or ever again.
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