Coinbase can’t move

Welcome to The Daily Moon. It’s a brand new week. And Compass Mining suddenly has money. The crypto mining company, which was unable to pay power bills until a few weeks back, is adding 25,000 miners. In case you are wondering where the funds are coming from, Compass cut salaries and sacked employees.

Moving on, today we talk about what went wrong at Coinbase, and the US SEC is doubling-down on crypto.

It was a mixed bag for the markets, with Bitcoin below $23,000 and Ethereum regaining $1,600 levels. Nasdaq fell due to weak numbers of Twitter and Snap. Back home, Sensex and Nifty held on to gains amidst buying from foreign funds.

Image by Sergei Tokmakov Terms.Law from Pixabay 

Coinbase Has A Problem

Coinbase was on a high in 2021. It became the first crypto exchange to be listed on Nasdaq. The crypto exchange’s assets skyrocketed from $36 billion in 2020 to $256 billion. But the bear market hit, and it was unable to cope. Rivals moved in and Coinbase was left behind.

The company has fallen from the top 10 crypto exchange list after Binance took up a 30% market share. It now is a has-been and ranks 14th on the list with a 2.9% market share. Its stock isn’t doing well either. Investors in the stock have seen the price spiral downward and stay down ~70% since 2022.

The back storyCoinbase started operations in 2012, at a time when Bitcoin was priced at merely $13.50. It made rapid progress by becoming the most visible and consumer-friendly crypto asset exchange over the years, while spending significant capital.

When Binance entered the scene in 2017, Coinbase had reached $1 billion in revenue. But soon after, Coinbase numbers started to falter. In 2018, it had $520 million in revenues.

The bigger aim was to be publicly listed so the company brought costs down, especially the marketing expenses. Meanwhile, Binance was steadily gaining ground without big advertising budgets.

Ahead of the listing in April 2021, Coinbase’s revenue jumped to $1.8 billion on the back of Bitcoin’s rally. Post the IPO, the numbers started to dwindle once again. In Q3 of 2021, total revenues fell to $1.3 billion. By then, the Bitcoin rally also cooled off.

The new year didn’t begin on a promising note. Crypto prices slipped. Between January-June 2022, Binance saw $2.8 trillion worth of trading while Coinbase clocked $506 billion. The next big trigger was the Terra-Luna crash in May that caused losses worth $60 billion to the crypto market.

In the first quarter, Coinbase reported losses of $430 million and a 35% drop in revenue.

The three mistakes Coinbase had a higher cash burn than its competitors. That’s why it is struggling to thrive. Here are three reasons why the exchange faltered:

1. High fee: Coinbase fee is comparatively higher at 4%. In contrast, rival Binance only charges 0.1%.

2. Steep Cash Burn: The company’s burn caused it to fire some soon after hiring people. In the first quarter alone, it burned $1.5 billion worth of cash.

3. Regulatory run-ins: SEC is uncomfortable with Coinbase’s lending foray proposal. In return, Coinbase blamed the SEC for the volatile regulatory environment.

A few things are out of its control though. Crypto volumes have slumped since the Terra debacle, and the US Fed’s rate hikes compound the problems.

Is recovery in sight? It is not the end of the road for Coinbase. The exchange will enter markets such as Italy as part of a Europe expansion plan. The stock rallied 14% after Coinbase clarified that it has zero exposure to bankrupt crypto firms. Analysts even expect a recovery by the end of 2022.

But, the firm has its share of troubles. There are insider-trading allegations against a former employee. The US SEC is more aggressive than ever. Its biggest competitor Binance is waiting to grab every opportunity. Coinbase’s future won’t be a smooth ride.

SEC Has A Verdict

Crypto is getting closer to stocks and bonds. In the first insider-trading case, the SEC classified nine crypto tokens as securities, meaning they come under its regulatory purview. This is giving the digital asset some legitimacy.

So what?Regulatory uncertainty has kept several institutions and retail investors away from crypto. While the SEC has equated crypto with securities in the past, this is the first it has made it official. In the latest case, the regulator has identified multiple crypto tokens as securities. There is no other action on the tokens so this means they can be sold, albeit under the SEC’s watch.

What’s next?With the SEC making its stance clear, ongoing legal cases such as the one with Ripple could also see similar claims. The regulator wants Ripple’s XRP token to be categorised as a security, something that Ripple doesn’t want. The crypto company may pull out of the US if it loses.

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