- Not that long ago, we were a tiny little startup
with a crazy idea
and here we are getting ready to go public, so.
- [Narrator] That was Coinbases' CEO,
just a few weeks before the company
scored an $85 billion valuation in its stock market debut.
Since it was founded in 2012,
the company has grown to be the largest
crypto currency exchange in the US,
thanks in part to its focus on making crypto accessible.
- It's just going to be sort of an easy,
seamless way for people to just get into crypto
and trade it, and that was their idea.
- [Narrator] It helped the company bring in
record revenue in 2021 as more traders joined the platform.
But as bitcoin and other crypto currencies fell
Coinbases' share value fell along with it
exposing deeper issues
with its business practices and culture.
So, what went wrong?
In 2021 the crypto industry was booming.
- The Coinbase public listing on its own
was driving a lot of enthusiasm for the rest of the market.
This was seen as a bellwether news event.
- [Narrator] The explosion in crypto drove more people
including many retail traders to Coinbases' platform,
and that drove up revenue in a big way.
Most of the company's money comes from trading fees
which it charges two types of traders.
First, retail.
- Who are basically, you know, mom and pop,
young kids, people like you and me,
people just kind of doing this out there on their own.
- [Narrator] And second, institutional.
- Brokerage houses,
pension funds,
hedge funds.
I mean, people who are out there
who have a business that is predicated
on your trading assets in the capital market.
- [Narrator] Much of Coinbase's trading volume
comes from these traders
but most of their revenue comes from these ones,
who make up its core customer base.
In the second quarter of 2021 90% of Coinbases'
$2 billion net revenue
was made from retail transactions alone.
Spurred on by a growing user base
Coinbase set its sites on growth.
They beefed up on hiring,
aiming to catch up to competitors
that had a wider span of crypto assets and products.
Between the end of the first and third quarters
it added more than a thousand employees.
In October Coinbase announced it would launch
its own NFT marketplace.
And in November, the share price shot to a high point
as the value of bitcoin peaked.
But there was trouble ahead,
especially for a company that relied on crypto enthusiasm.
- These things are all latched, very, very tightly
to sentiment in the crypto markets.
In the stock market stocks like Coinbase
become a proxy for the crypto markets
and that's why you see the stock prices
track crypto so closely.
- [Narrator] As the Fed began to shift its monetary policy
to tackle inflation,
many professional investors started
to pull out of assets that they considered riskier.
- Crypto became sort of one asset in a larger portfolio.
If you're a professional trader,
you make, you know, you buy bonds,
you buy stocks, you buy commodities,
you buy currencies, and now you are buying crypto.
So you were slotting crypto in among those different assets
and where it ended up being slotted
for most of them was it was the risk asset,
it was a highly volatile asset.
- [Narrator] In April Coinbases' share price drops steeply
as trading volume fell
and analysts slashed estimates for earnings.
Transactions were down and retail traders
were pulling out of the market.
Some were HODL-ing shorthand for holding on for dear life.
It means that they were sitting on their crypto currencies
trying to ride out price declines,
and hoping to come out on top at the other end.
That also means that they were making
fewer trades and transactions,
the main things that Coinbase relies on to make money.
The stock price continued to slide in May
when the company reported losses in the first quarter.
- When you started to see business results come in
and the business results were really bad.
I think that's when people started to realize
that this was not just one of,
you know, cryptos sort of periodic common spasms.
- [Narrator] As trading continued to slow and revenue fell
larger problems within the company were exposed.
- Certainly early in 2022, it was hard to tell how
severe the sell off was going to be.
There wasn't a lot of panic
and you saw companies like Coinbase,
they kept hiring, they were in expansion mode
and they just kept running with that
despite the fact that the prices started to fall.
- [Narrator] The company hadn't built up
other streams of revenue
in time to make up for falling profits.
The NFT marketplace they had announced in October
didn't materialize until April,
just as the NFT market was flat lining.
The platform did just 4.2 million in transactions
between when it went live in April
and the beginning of August.
Coinbase has also offered things
like staking and custodial services.
- Now, especially it's just a really hard time
to try to build new businesses in the middle of,
you know, a completely downed market.
- [Narrator] In early June, a petition,
purportedly from Coinbase employees
was posted to another crypto site.
It called to oust several executives
over the company's performance.
Armstrong tweeted that the petition
was really dumb on multiple levels.
- I think probably issues that were inside the company
that largely were papered over
because times were so good in 2021
started to emerge in 2022.
- [Narrator] A few weeks later
the company announced it would cut its workforce
by about 18% to reduce spending,
its employee count had grown to nearly 5,000.
And Coinbase ran into more trouble in July
as federal authorities charged
a former product manager from the company
with insider trading.
Lawyers for the former product manager said
that the charges were meritless.
The SEC also took the position
that several of the crypto assets
traded on the company's platform
are classified as securities.
The company, which isn't licensed to operate
as a securities exchange, denied that the assets qualify.
By the end of quarter two,
the retail trading volume fell by 74%
from the high in quarter four of 2021.
To make up for lost ground Coinbase plans
to continue to grow its other streams of revenue.
In June, it launched a derivatives product
that allows traders to bet on the price
of an underlying asset.
The company announced a partnership
with Money Management from BlackRock in August,
which could help increase the number
of institutional investors that use the platform.
Coinbase says that it has built up
more client requested products
and is seeing a strong uptake.
Armstrong told CNBC in August
that the company's planning on increasing its earnings
from subscriptions and services,
which made up about 18% of its quarter two revenue.
- We're realizing that trading fees
is not gonna be that thing that,
you know, it's gonna be,
it's still gonna be a major part of our business
in 10 years from now, even 20 years from now.
But I'd like to get to a place where more than 50%
of our revenue is subscription and services.
- [Narrator] Businesses across the crypto industry
have been impacted by the downturn,
but competitors like Binance and FTX
have continued to grow
and are gaining market share of spot trading.
However, since neither company is public,
it's not clear how much their earnings
have currently been impacted by the market.
In its quarter two letter to shareholders,
Coinbase said that it lives by the mantra -
it's never as good as it seems,
and it's never as bad as it seems.
And that, it is an all-weather company
with experience in navigating crypto asset price cycles.
The company's share price has seen
a small increase in recent months.
Coinbase says that it continues to take a long term view
and remains focused on building for the future.