- It is not profitable to be a crypto exchange in 2022
- The report shows a huge net loss
- According to the report, retail investors have not left
- Coinbase stock has fallen 77% since January
The Coinbase exchange, one of the most important players in the sector, confirmed the current market troubles in its quarterly report. The cryptocurrency trading platform has been affected by the declining interest in bitcoins and other cryptocurrencies.
The digital asset industry is going through one of its worst years since bitcoin’s introduction in January 2009. According to CoinGecko, the market is down sharply by $2 trillion from November’s record high of $3 trillion. Bitcoin (BTC), the most popular cryptocurrency, has lost more than 69% of its value since reaching a record high of $69,044.77 on Nov 10, 2021.
At the same time, according to Chainalysis, a blockchain security company, hacks have reached an all-time high, negatively impacting the mass adoption of cryptocurrencies.
Added to this is the regulatory uncertainty in the United States, where regulators still prefer to legislate by imposing sanctions rather than by setting a clear framework.
Coinbase’s third-quarter 2022 report showed that crypto winter is in full swing and even stalwart market players are having a hard time surviving it.
The platform released a report showing disappointing results for the third quarter. According to the statement, quarterly revenue fell 53.4 percent year over year to $576 million, with revenue declining each quarter compared to the previous period. For the April-June quarter, Coinbase reported revenue of $803 million, already down 31% from $1.2 billion at the start of the year.
“At the end of Q3, assets on the platform were $101 billion, up 5% from $96 billion at the end of Q2. The growth was mainly due to net inflows from customers, as well as rising cryptocurrency prices at the end of the quarter. Our market share of total crypto market capitalization declined slightly to 9.6% at the end of Q3 from 9.9% at the end of Q2. The decrease in market share was due to price effects (i.e., larger price decreases for assets that have a higher concentration in Coinbase like BTC).”
The firm also confirmed another trend in its report: it still has not made money since January. Coinbase recorded a net loss of $545 million in the third quarter, down by half from the second quarter. That loss reduction is due to the fact that the company was able to drastically cut its expenses by 38% in three months: in June, the company cut 18% of its 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 – have weighed heavily on financial markets and crypto markets throughout 2022.”
“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 declined sharply since January. The company ended 2021 with 11.2 million monthly transacting users (MTUs) in the fourth quarter. That number dropped to 9.2 million MTUs in the first quarter of 2022 and then to 9 million MTUs in the second quarter before dropping to 8.5 million MTUs in the third quarter ending on September 30. For the current quarter, Coinbase says it will be “slightly below” 9 million MTUs.
The decline in the number of users is reflected in revenue. Revenue from transactions by retail investors fell to $346.1 million, down from $1.02 billion in the third quarter of 2021. Trading volumes were $159 million in the third quarter, down 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.
While Goldman Sachs analysts applaud the group’s desire to continue cutting costs, they remain concerned about declining 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,” the statement said.
“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 assess the company’s financial health.
The platform did state that it ”will operate within the $500 million adjusted EBITDA loss guardrail that we previously communicated” unless market conditions deteriorate.
But Coinbase has identified a factor that could prove very positive going forward.
Retail investors have not gone away. If they are trading less, they are keeping 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.”