It’s a Make-or-Break Moment for Coinbase — What Should Investors Do?

During 2020 and a good portion of 2021, investors experienced unparalleled stock market euphoria. Whether internet personalities were pumping the next GameStop or retail traders were looking for the next needle in a haystack, perhaps no other asset class rocketed to the moon faster than cryptocurrency.

While there are a number of large crypto tokens such as Bitcoin, Ethereum, and Solana, there also are thousands of alt coins, any number of which are scams. For those who were looking to invest in crypto without picking an individual token, trading exchange Coinbase (COIN 6.76%) looked like a reasonable option. After a widely followed public offering in 2021, Coinbase stock reached stratospheric levels. It’s no coincidence that the company’s stock price was moving in lockstep with Bitcoin and other major tokens. Looked at another way, Coinbase stock is highly correlated to the volatility in the broader crypto markets.

While this may be exciting, investors need to remember that this relationship works both ways. And as crypto enthusiasm has waned throughout 2022 as investors flock to less-speculative asset classes, Coinbase stock has suffered. Amid management criticism, new relationships with large financial institutions, and increasing competition from private market start-ups, Coinbase certainly presents an interesting case study. Let’s dig into the company’s happenings and assess if now is a good time to buy the stock.

A mouthful of jargon can’t hide the truth

In Coinbase’s second-quarter 2022 shareholder letter, Chief Executive Officer Brian Armstrong wrote the following: “We are taking steps to streamline our operating cost structure, including recalibrating our hiring plans, optimizing our vendor spend, increasing discipline in the deployment and measurement of marketing spend, and reducing near-term capital allocated to discretionary investment.”

Make no mistake, dear reader. The above explanation is corporate jargon for cost-cutting and a call for reduced investment in the business. When management teams make these types of announcements, it is usually to curtail some obvious faults of executive leadership. However, what is atypical in Coinbase’s case is that the employee base at large actually spoke up and pushed back against management.

Coinbase announced plans to reduce headcount by 18%, as well as rescind some job offers to pendingcandidates. The company cited broader market conditions, particularly the ongoing fear of a recession, as its rationale. Furthermore, Armstrong admitted that he thinks Coinbase invested too aggressively and, in effect, became bloated. Unfortunately, by growing too quickly, leadership was tasked with the difficult decision to cut back on lofty growth initiatives and reshift its focus on getting back on track as efficiently as possible. 

As a result, a cohort of Coinbase employees started an online petition calling for the removal of specific executives. What would normally have remained internal affairs became public knowledge and the company’s stock reflected the corporate discontent and turmoil.

Image source: Getty Images.

Major step forward with institutions 

Generally speaking, cryptocurrencies have gained much more traction with retail traders than sophisticated institutional investors such as investment banks or hedge funds. However, Coinbase has remain undeterred to become a trusted crypto ecosystem for both small and large investors, and it appears to be making some headway.

According to the company’s latest shareholder letter, Coinbase increased its institutional customer base to more than 14,500 as of the end of Q2 2022. By comparison, the exchange had less than half this number of institutional clients in Q2 2020. A big contributor to this surge in institutional customers is the company’s recent partnership with asset management firm BlackRock.   

Joseph Chalom, Global Head of Strategic Ecosystem Partnerships at BlackRock, said, “Our institutional clients are increasingly interested in gaining exposure to digital asset markets and are focused on how to efficiently manage the operational lifecycle of these assets.” This statement seems to back up the 2020 prediction of tech-savvy investor and CEO of Ark Invest, Cathie Wood, who said “large institutional investors like endowment funds, pension funds, and sovereign wealth funds might consider a small allocation to bitcoin in their exposure to alternative assets instead of a strategic allocation to a new asset class.”  

While Bitcoin are Ethereum are down 60% and 65% year to date, respectively, Coinbase’s partnership with BlackRock should serve as a major sign of encouragement for both the company and investors. The partnership illustrates that large institutional investment funds are taking crypto seriously, and assessing its risks, rewards, and appropriate place in diversified portfolios.

Private markets remain white-hot

At the time of this article, Coinbase stock is down 75% in 2022 alone, and its market capitalization sits at about $16.5 billion. Investors may think that since Coinbase has experienced such dramatic sell-offs, the company’s competition, much of which is privately held, may struggle to raise capital and make progress. However, recent developments in the venture capital realm of crypto suggest otherwise.

Earlier this month, non-fungible token (NFT) company, Doodles, raised $54 million, giving it a valuation of more than $700 million. According to venture capital tracker Crunchbase, this was the first time Doodles raised outside financing.

In addition to Doodles, Coinbase competitor FTX is reportedly planning to raise an additional $1 billion at a $32 billion valuation. While this values FTX essentially unchanged from its prior funding round, investors could argue that this is a positive sign in an otherwise bear market for crypto.   

Overall, it is clear that Coinbase stock has fallen as support for Bitcoin and other major cryptos has waned. However, there are a number of signs that large investors are still willing to hold individual tokens, and to help finance crypto start-ups. While Coinbase certainly has a long road ahead, now could be a very interesting time to buy the stock to have some exposure to the broader crypto market. Perhaps the most prudent action for investors is to assess future earnings results and see if the cost-cutting initiatives are being executed, thereby paving a path forward for the company. Moreover, keeping a keen eye on capital raising in the start-up arena will serve as a good proxy for investor enthusiasm in crypto.