It's not good to be a crypto investor or a cryptocurrency exchange in 2022.
The digital asset industry is going through one of its worst times since the emergence of bitcoin in January 2009.
The market has fallen sharply $2 trillion compared to its November all-time high of $3 trillion, according to data firm CoinGecko. Bitcoin (BTC), the most popular cryptocurrency, has lost more than 69% of its value since hitting a record high of $69,044.77 on Nov. 10, 2021.
At the same time, hacks have reached an all-time high, according to blockchain security firm Chainalysis, which is helping to undermine the mass adoption of cryptocurrencies.
Huge Net Loss
Added to this are regulatory uncertainties in the United States where regulators still prefer to legislate more by sanctioning than by establishing a clear framework.
Coinbase (COIN), one of the most important players in the sector, has just confirmed all these misfortunes which are not about to disappear.
The platform posted disappointing results in the third quarter. Quarterly revenue fell 53.4% year on year to $576 million, according to a statement. What is striking is to see that revenues are only decreasing each quarter compared to the previous quarter. In Q2, Coinbase generated $803 million in revenue, which was already down 31% from $1.2 billion in Q1 revenue.
The firm also confirmed another trend: it still does not earn money since January. In the third quarter, Coinbase recorded a net loss of $545 million, halved compared to the second quarter. This reduction in the loss is due to the fact that the company managed to drastically reduce its costs by 38% over three months.
In June, the company cut 18% of jobs, or 1,000 people who were laid off.
In the third quarter of 2021, the company was profitable, posting a net profit of $406 million.
"Q3 was another tough quarter," the company said. A variety of macroeconomic factors – consumer prices grew at the highest rate in 40 years and the fed funds rate reached its highest level in 14 years – and geopolitical factors – notably the Russia/Ukraine war – have weighed heavily on financial markets and crypto markets throughout 2022."
"While crypto markets have not always correlated with macroeconomic conditions, we are seeing the broader risk-off appetite correlate with movements in crypto prices this year."
The firm continued: "In addition to average crypto prices being lower, they remained relatively range bound in Q3. As a result, crypto asset volatility – a key driver of our retail trading volume – reached its lowest point in Q3 since 2020."
Coinbase's user base has been in steep decline since January. The company ended 2021 with a bang, with 11.2 million monthly transacting users (MTUs) in the fourth quarter. The number dipped to 9.2 million MTUs in the first quarter of 2022 and then to 9 million MTUs in the second quarter before falling to 8.5 million MTUs in the third quarter ended Sept. 30. For the current quarter, Coinbase says it will be "slightly below" 9 million MTUs.
Retail Investors Have Not Left
The decrease in users is reflected in revenues. Revenue from transactions made by retail investors fell to $346.1 million, compared to $1.02 billion in the third quarter of 2021. Trading volumes were $159 million in the third quarter from $327 million in the same period a year earlier.
Coinbase said it expects "lower trading volume and a similar number of MTUs compared to our Q3 results" in the fourth quarter.
Coinbase shares have fallen 77% since January.
While Goldman Sachs analysts welcome the group's desire to continue to cut costs, they remain concerned about the decline in trading volumes and the firm's pessimism.
"We remain cautious, as the company reiterated several times their expectations to manage the business to negative EBITDA in the near term absent a major change in the market environment, which we believe is unlikely to result in improvement in sentiment given the continued decline in crypto trading volumes into 4Q," Goldman Sachs said in a research note.
"Additionally, COIN management discussed the ongoing regulatory uncertainty in the crypto ecosystem, which is limiting the ability of the company to roll out new products, and which the company believes is driving retail trading volume to offshore trading venues."
EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors to gauge the financial health of a company.
The platform has indeed said that it "will operate within the $500 million adjusted EBITDA loss guardrail that we previously communicated" if market conditions don't get worse.
But Coinbase has identified a factor that could prove very positive in the future.
Retail investors have not left. If they trade less, they kept their digital assets on the platform: "We view this as a sign that, on average, our customers maintain long-term conviction in crypto and we believe they will likely become more active when market conditions improve."
