Headline: What just happened to Coinbase?

Full Disclosure: In full disclosure, I do own a small volume of shares in Coinbase.   The value of this equity is not significant with respect to my net worth and is in no way significant to the corporation.

Body:  A little while ago, I outlined ways to invest in crypto without investing in crypto.   Buying shares in Coinbase was one of the ways I spoke of as a method to participate in the hot craze without being excessively endangered by cryptocurrency shenanigans.  So, I took my own counsel… and have lost a moderate amount.   (My first purchase was in May of last year, and I just placed an order.  In May, I paid over $125 per share, and at the end of December, I paid just $34 per share.)  I am staying in mainly because I have a firm belief in the (what’s the word?) craziness of gamers.   In short, Bitcoin and Ethereum are not perfect, but, they do remain financial “on-ramps” to other cryptocurrencies.     Each game seems to have its own native currency, and can usually only be purchased using ETH.   The easiest way for the lay person to obtain ETH is to purchase it.   And, likely the easiest place to purchase it is at Coinbase.  My time horizon is pretty long and I view the current very low valuation as being able to purchase stock on sale.  Of course, this might be self-delusion or just WRONG.   Do your own research, always.

Sorry, got off on a little tangent.   Coinbase stock has been going steady, in the downward direction for the majority of its existence.    I have to wonder what’s prompting this?

So, don’t bury the lead.   What’s happening?

Pure and simple, investors are afraid.   Not long ago, they witnessed the bankruptcy of FTX (remember them?) and the arrest of the executives of that company.  Further stoking the fire of fear, Coinbase is closely related to USD Coin, and now, rival Binance is encouraging investors to re-think investment in USD Coin after the joint venture (between Coinbase and USD Coin ) decided not to go public..  This makes investors quite nervous about Coinbase. 

That sounds reasonable… so why do you own stock here?

I very much like their first-mover advantage in this space.  I also like the future prospects in the gaming space as mentioned above.  But, even right now, Coinbase is no FTX for a few reasons:

  1.  Its books are audited by Deloitte
  2. Coinbase is  capitalized with $5 Billion in cash.
  3. They advertise that they hold 90% or more of their cryptocurrency deposits in cold wallets, offline.   This suggests a very clear mindset to security and safety.

But, didn’t I just read about huge workforce reductions?

Yes, you did.   Coinbase is firing about 20% of its workers in an effort to “rightsize” the organization.  Certainly, for the people who are laid off, this is nothing less than a tragedy.  But, if you are a heartless investor, this adherence to a lean organization might indeed be a  good thing.  This has happened in many nascent industries before, like the railroads and the utilities.  One critic pointed out that companies in new industries often have a similar employment pattern.

So, what was the response in the market?

Coinbase’s stock price increased  about 9%, just after the news of the layoffs struck the general public.   Oppenheimer still gives Coinbase an evaluation of “outperform” for its prospects.  Further, their partnership with USDC is seen to be a potential boon, as USDC just became the 4th largest cryptocurrency with a market capitalization of $44 Billion. 

The Verdict

We are encouraged by this morning’s news, as it shows the company is taking financial discipline seriously in a very challenging crypto/macro environment,” analysts from Barclays wrote. However, they said the layoffs could also be a sign the crypto exchange company is preparing for a tough year ahead.  I chose to put this quote in the wrap-up section because I think it neatly summarizes some of the problems and opportunities with the cryptocurrency investment industry.  Many analysts are looking at this shedding of employees as potentially good in the long run.  Please focus upon the last 4 words, “in the long run.”   Look at the stock chart for Coinbase on 1/10/2023, and you will see a large increase in value, over the course of the day.   But, look at it in the broader (5 year) frame and the pattern quickly becomes an obvious downward curve.   Now think about how you think about a new car.    At first, you are ever so careful about who rides in it, what you haul with it, and you probably park it in the far corners of the Wal-Mart lot.  As time goes on, it becomes your vehicle to get from A to B, and the fact that you used it to haul mulch for the Church really doesn’t bother you.  Near the end, you get pretty numb when you get the very low estimate from CarMax or a ridiculously low value from a private buyer.  I think cryptocurrency is pretty similar.   At the beginning, it went way up (when people were extremely excited), and then relatively slowly went pretty far back down (like the “new” car after 3 years.)   Before the inherent value of Coinbase can be widely seen, I think that cryptocurrency needs to become like that “new “ car, at the end of Year 6.  Said another way, before Coinbase can go up a lot, I think people need to begin to see cryptocurrency as just another investment.  I don’t know if we’re there yet; I think we might be 2-3 years out from a transition to that point.  So, in the parlance of the finance bros, I am going to HODL (Hold Onto Dis Long-term.)  But, I promise you that my investment here won’t exceed 5% of my portfolio.






Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.


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