On Its 10th Anniversary, Coinbase Is Facing a Crisis of Growth As Crypto Winter Is Here.

Coinbase has lost more than 85% of its stock market value since the ATH of Bitcoin in November 2021.

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On June 20, 2012, the company that would become one of the most influential in the cryptocurrency world was founded. As Coinbase celebrates its 10th anniversary, the mood is not exactly celebratory in a more than gloomy context for the entire cryptocurrency sector.

In an email sent on June 14, 2022, to its 5,000 or so employees, Coinbase announced the layoff of a fifth of its workforce to ensure its survival. After a stellar 2021, which saw the global cryptocurrency capitalization peak at $3,000 billion in November 2021, the fall in Bitcoin's price has only gotten rougher.

“We grew too fast,” confesses Brian Armstrong, Coinbase's co-founder, and CEO. The company has experienced other bear market crises in its young history, the so-called crypto winters, but this one is probably the most painful.

For in its ten years of existence, Coinbase has radically changed in size and ambition. “Our mission: to create an open financial system for the world,” repeats Brian Armstrong. “The first product I had in mind was to build a hosted bitcoin wallet that was easier to use, I didn't even have the idea of making an exchange or brokerage platform at first to help people buy and sell,” the young entrepreneur told to the Startup Lessons Learned podcast.

The son of an IBM engineer, raised in San Jose in Silicon Valley, Brian Armstrong studied computer science and economics. He discovered the potential of Bitcoin in December 2010, when he read a white paper by Satoshi Nakamoto, the pseudonym of the inventor of this revolutionary new protocol for securely exchanging digital currency via a decentralized computer network, the Blockchain.

At the time, Bitcoin was worth less than a dollar and its complexity of transferring money limited it to a small group of passionate geeks. Brian Armstrong was then an engineer at Airbnb. There he discovered the difficulties the platform had in transferring money in certain countries where it operated and the opacity of the rates charged by local payment players.

In his spare time, Brian Armstrong began working on a prototype of a hosted wallet, allowing Bitcoin to be held more easily via a third party, in the same way, that a bank holds money in a checking account. Accepted into the renowned startup incubator Y Combinator, he resigned from Airbnb to focus full-time on expanding his concept.

With his co-founder Fred Erhsam, a trader at Goldman Sachs, and a check for $150,000, he laid the foundation for Coinbase on June 20, 2012. In October 2012, the two men launched the first service to buy and sell BTC on the Internet by bank transfer. The digital currency is worth about $13. A year later, after brutal variations, it exceeds 1,000 dollars for the first time.

Consecration at the time of its IPO in April 2021

In February 2014, Coinbase benefited from the bankruptcy of Mt. Gox, the oldest and largest Bitcoin exchange platform at the time. After a sharp drop in prices, interest in cryptocurrencies picks up and grows year after year despite the inherent volatility of the free market that is Bitcoin. At the same time, Coinbase is developing its infrastructure and expanding its services. In December 2017, the year Bitcoin peaked at nearly $20,000, the New York Department of Financial Services (DFS) granted it a license to integrate two Altcoins, Ethereum (ETH) and Litecoin (LTC).

Coinbase appeals to investors for its security, ease of use, and range of available Altcoins. The platform is struggling to keep up with demand as Brian Armstrong stated in a tweet:

“Perhaps the most challenging period for Coinbase was the fall/winter 2017-2018. With the explosion of ICOs, we experienced a surge in transaction volumes like we've never seen before. Virtually overnight, we saw volumes X times higher than average. It was a challenging time for the company and our employees. We were not meeting our customers' expectations for site reliability or customer support. We knew we had to do better.”

The rising star of the crypto universe has its dark side. Accused of artificially inflating trading volumes on its platform between 2015 and 2018 - a practice known as “wash trading” - thereby deceiving investors, it will be fined $6.5 million by the Commodity Futures Trading Commission. In 2018, the Coinbase platform raises $ 300 million to accelerate its development.

The crypto winter following the bursting of the Bitcoin bubble puts a damper on its hyper-growth for a few months. “Being in cryptos during that period was incredibly difficult and lonely. But Coinbase and the crypto economy more broadly came out stronger. Many new and exciting projects, entrepreneurs, and communities were formed during this time,” says Kate Rouch, Coinbase's head of marketing.

At that time, the company launched Coinbase Ventures, an investment fund to support and grow the Crypto/Blockchain ecosystem. The company, whose business model is based on user transaction commissions and custody fees, knows it needs to look for new revenue streams.

In April 2019, it is launching a payment card that allows purchases in cryptocurrencies in stores or withdrawals from ATMs. Coinbase is developing subscription-based services for individuals, and businesses and is developing a tailored offering for institutions, whose appetite for these new assets will open wide from 2020.

2021 will be the year of consecration. The company reveals itself to the general public with an IPO on the New York Stock Exchange on April 14, 2021. The initial price of 250 dollars per share climbs to 381 dollars at the start of trading on the Nasdaq. Beyond the financial success, the operation symbolizes a legitimization of cryptos in the traditional financial world. With record annual revenues of $7.4 billion for the year, Coinbase is now a member of the Fortune 500.

The current Bear Market is causing Coinbase to falter

Coinbase is recruiting in droves to expand all over the world, especially internationally, and is spending a lot of money to increase its notoriety. Especially since competition in the sector has sharpened. In addition to its long-time rival, Binance, FTX is now vying for its market share.

In February 2022, Coinbase took out a $14 million ad during the popular Super Bowl finale. Faced with the sudden influx of visitors, its infrastructure will not hold the load... Again!

The setbacks are piling up. The drop in the price of cryptos is driving away active users quarter after quarter. The drop in revenue is causing its stock price to fall, divided by 7 since its high last November. Forced last year by the U.S. Security and Exchange Commission to give up a lending product, Coinbase was counting on its NFT platform to capitalize on the success of these new digital assets.

Launched at the beginning of May 2022 with a lot of communication and marketing, Coinbase's NFT platform is a flop: this market is also in full decline. Under intense market pressure, Coinbase must now manage its expenses as closely as possible.

“It seems that we are entering a recession after an economic boom of more than ten years. A recession that could lead to another crypto winter and last for an extended period,” believes Brian Armstrong.

In late March 2022, the company was targeted by a short-seller who considered the platform a “bubble stock” whose price would plunge. In mid-May 2022, Coinbase announced a net loss of $430 million in the first quarter of 2022. The price decline has only gotten worse since then.

Brian Armstrong gave himself a “small” birthday present at the beginning of 2022: a luxurious villa in the chic Bel Air district of Los Angeles, valued at $133 million. According to the Bloomberg Billionaires Index, his fortune has since melted by 84%. It is still valued at $2.2 billion, but it could continue to fall in a complicated situation for all risk-on markets.

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Some reading

• The 7 Stages of a Bear Market – Where Are We With Bitcoin? Probably between panic and accumulation/stabilization.

• The Firefighter Arsonist’s Paradox — Central Bankers Are Now Worried About Inflation. Yet inflation is the product of their ultra-accommodating monetary policies.

• Facebook in the Cryptocurrency World: Story of a Fiasco. The danger of Libra/Diem was far too great in the eyes of American regulators.

• How Tim Cook and Jony Ive Allowed Apple to Survive Steve Jobs but Lost the Company’s Soul. Apple is no longer the innovative company it was in Steve Jobs’ day.

• Here Is Why Bitcoin Is the Best Stablecoin. Few understand this.