How Long Has Coinbase Been Around

It was among the outset cryptocurrency startups in the country when information technology launched a decade ago. It went on to become the first crypto unicorn, nabbing a $1.6 billion valuation in 2017. It was the commencement crypto exchange company to listing on Nasdaq in 2021. And it was probably the first finish for your cousin, tertiary-course teacher, and maybe even your grandma when wading into the wild waters of crypto. Information technology certainly was the first visitor in history to spend millions bouncing a QR lawmaking around the screen during a Super Bowl advertizing, a gambit that resulted in more than twenty million visitors jamming upwardly the site.

Oh, and equally of this yr, Coinbase is the showtime crypto visitor to join the Fortune 500.

Being kickoff has its benefits: Coinbase is now the largest crypto exchange in the U.S. by trading volume. Its cofounder and largest shareholder, Brian Armstrong, commands a cyberspace worth teetering just under $iii billion. The venture capitalists who backed the company early on, like Andreessen Horowitz and Wedlock Foursquare Ventures, have seen dazzling returns from their bets, with some going on to stand upwardly crypto-dedicated funds in hopes of finding the adjacent Coinbase.

But Coinbase’s latest offset—its start-quarter earnings for 2022—was quite a dissimilar story. In mid-May the visitor shocked Wall Street by announcing that its in one case voluminous profits had plunged to a $430 meg loss. Monthly transacting users, the holy grail for measuring client action, fell from 11.4 million in the final three months of 2021 to 9.2 million, and the company expects that to fall further in the second quarter. The stock has plunged 73% year to engagement, from a high of $252 to around $67.

It is all together a stunning reversal for a company accepted to being, well, outset.

To make matters worse, while customers are pulling dorsum, competitors are circling. Sam Bankman-Fried’due south FTX has been building out a one-stop store for crypto trading in the U.S. and now is turning toward stocks. The American offshoot of Binance, the world’southward largest crypto substitution, has moved in to the U.S. with a low-fee trading platform. Even Robinhood is mounting a challenge, announcing in May a plan to permit users hold and custody their own crypto and NFTs (not-fungible tokens). And as the economic moving-picture show darkens, one thing is clear: Coinbase is hardly the kind of diversified industrial visitor or many-military machine business built to weather a downturn. The company’s wildly profitable coin-spinning machine works only when customers are obsessively trading crypto. That’s where nearly 90% of Coinbase revenues come from. Merely the past six months have seen Bitcoin fall 46%. Ether has plunged 53%. And then-chosen stablecoins similar Tether, which are intended to make it easier to apply crypto for transactions and lending, have lost their pegs to the dollar earlier recovering. And sketchier offerings like Terra, an algorithmic stablecoin, and its token, Luna, have been effectively wiped out. It has been a bloodbath for crypto—and for Coinbase.

Equally investors size up the visitor at present, they’re asking some vital questions: Will crypto rebound? And if it does, how mainstream can it go, and what piece of that pie volition Coinbase hang on to? The company has been asked and has answered those questions before—most recently during the 2018 crypto winter, when some predicted the company’southward demise. Every bit COO Emilie Choi put it during the company’southward earnings call: “We’re in a potent position. We have a solid residual canvas and nosotros’ve been through several market downturns before, and we’ve emerged stronger every time.” Armstrong went on to paraphrase the famous Warren Buffett motto, no matter that the Oracle is a notorious crypto skeptic: “We’re greedy,” he said, “when others are fearful.”

It was effectually
the winter holidays, back in 2010, that Armstrong starting time learned nigh Bitcoin. Sitting in his parents’ dwelling, the San Jose native came across a mysterious white paper about it online past Satoshi Nakamoto. A single Bitcoin price less than $i at the time. “When I saw the Bitcoin white paper, my thought was, ‘Wow, this is kind of similar the next internet,’ ” Armstrong, who declined to comment for this story, recalled in 2021 on a podcast. “What if this could build a financial system that’s more costless, more than global?”

Armstrong was hooked. In late 2011, when he was spending his days working equally an engineer at Airbnb, he’d retreat habitation at night and devote the final iv to five hours of the day to coding on what would go Coinbase. “I couldn’t aid myself,” he afterwards said. Then known as BitBank, the startup’s original idea was to provide Bitcoin owners a safe mode to store the crypto that they bought and then that they would non have to recollect the 64-character private fundamental that provides access to it. Information technology was a model designed to open up up the niche crypto markets to the masses. But Armstrong quickly discovered a bigger trouble: Few users needed a prophylactic way to store Bitcoin because they did non have an easy way to buy information technology. So, in belatedly 2012, Armstrong, along with his cofounder, quondam Goldman Sachs trader Fred Ehrsam, launched a “buy Bitcoin” feature on Coinbase.

The product was a hitting, with users drawn to the sleek nature of the app that made crypto investing more similar ownership or selling a stock than wrestling with an arcane new blockchain engineering. Coinbase had more than than 650,000 consumer Bitcoin wallets past Dec 2013. Venture capitalists apace became intrigued, pouring $30 million of funding into Coinbase in 2013 through a Series A in May and a Series B in December. Its investors were some of the near high-profile names on Sand Hill Route, including Andreessen Horowitz, which is Coinbase’s third largest shareholder today, according to S&P Global Market Intelligence data. “Bitcoin is the first plausible proposal for an economic protocol for the internet,” Andreessen Horowitz’s Chris Dixon wrote in a weblog post about the investment. “But to proliferate widely, Bitcoin needs a killer app the same way HTTP had spider web browsers and SMTP had email clients.” Coinbase had the potential to get just that. The company made the early and prescient conclusion to cooperate with regulators rather than wrangle with them and focus on marketing itself to the masses as the reliable and secure crypto exchange. And and then, in 2017, came the $100 meg Serial D that fabricated Coinbase the starting time crypto unicorn. It was a banner moment for Coinbase and, by extension, the crypto markets, which had been ripping higher throughout the twelvemonth.

But then 2018 hit.

While Coinbase
had been through plenty of crypto winters before, 2018 was on a new stage. Choi, a longtime LinkedIn executive, beginning met Armstrong in 2017. He pitched her on a vision of a new financial and technological frontier, 1 built on blockchain engineering science that could help increase economical liberty in the world. Choi says she had shivers down her spine.

Bitcoin was trading at near $20,000 in December 2017, only by the time Choi was through the onboarding process in March, it was closer to $10,000. It slid to $3,200 one yr subsequently Choi signed on. “My naive self was non prepared for this at all,” Choi recalls thinking during a video call with
Fortune
in early May. “I had no thought about the volatility that I was about to confront.”

It was a learning moment for Coinbase. Throughout the market’s boom in 2017, the visitor had come across several issues—some equally basic as whether the website could handle growing traffic, others more than complicated, like a flash crash in the price of Ethereum. And so when the burst of action finally subsided, Coinbase got to piece of work. “Things operate differently during peacetime than wartime,” Armstrong one time said, according to
Kings of Crypto, by former
Fortune
reporter Jeff John Roberts.

The company did not behave whatever sweeping layoffs; rather, it doubled its headcount in the year leading up to September 2018,
Fortune
reported at the time. Of class, information technology helped that the involvement from investors was yet strong. A little over a yr subsequently the 2017 fundraise, Coinbase raised new funding that valued it at $8 billion.

Some execs departed; others, similar Choi, stayed. “Having pushed through and navigated through that at present, we’re then much stronger every bit a company,” Choi says. “We learned how to do the ups and downs together.”

Coinbase is certainly much larger now. Recall of it equally a startup, but in a arrange. While anyone used to be able to problems Armstrong in the hallway with an idea or a decision, with nigh v,000 employees that’s no longer realistic. Coinbase became a remote-starting time visitor at the starting time of the COVID-19 pandemic and ditched an official headquarters. It’s more corporate at present, too: It adopted RAPID, the framework born out of direction consulting house Bain & Company, to help speed up controlling. In a blog postal service from Oct, Choi says such a framework helps in determining whether to exit a certain market, for instance.

That said, vestiges of the defiant, norm-breaking culture of crypto certainly remain. Armstrong, for instance, remains prone to dropping shade on the company’southward critics on Twitter. In 2021, when the Securities and Substitution Commission effectively forced Coinbase’s hand to finish the rollout of an upcoming lending product, Armstrong tweeted that there was “some really sketchy behavior coming out of the SEC.” And and so at that place was Coinbase’s decision in 2020 to adopt an “apolitical culture,” which Choi cites as one of the best moves the company has always fabricated. Choi says that Coinbase’s culture, every bit ane former executive used to put information technology, is like a mullet: “Business organization in the front, crypto in the back.” It’s the business side of things, notwithstanding, that has some analysts questioning the visitor’southward future.

It tin can exist
an intimidating experience for investors not bilingual in the languages of Corporatese and Cryptonian to listen in on a Coinbase earnings call. But the reality is that for all the talk of dapps and NFTs and opex, Coinbase’southward concern is relatively simple equally information technology exists today. The company earns almost 87% of its revenues from collecting a fee from each transaction. In the start quarter, it nerveless most vii% of its revenues from fees related to customers staking their crypto through the platform (a procedure by which users contribute to the operations of a blockchain’south network and earn rewards). Another 3% came from custodial fees collected by the company in return for storing customers’ crypto tokens offline. But analysts see such companion businesses as just that, companions.

Trading is the moneymaker, and in that location’due south the rub. When markets are on the rising, Coinbase’southward model works brilliantly. In 2021, Coinbase brought in $6.49 billion in transaction fees from its individual investor client base of operations, upwardly 524% from 2020 and i,399% from 2019. Institutional investors, meanwhile, paid out $346.iii million in transaction fees to Coinbase. That represented a 519% spring from 2020 and a 1,051% spike from 2019.

No wonder investors were rattled by Q1 of 2022. Revenues? Down 35% twelvemonth over year. Expenses? Up 111.6% from the same period of 2021, thanks, at to the lowest degree in role, to Coinbase’southward contempo hiring spree that saw its headcount get from 1,249 employees at year-end 2020 to three,730 at the end of 2021 to now 4,900. And profits? A cyberspace loss per share of $1.98. It did non affair that months earlier Coinbase had warned that a slowdown was afoot. Shares plunged 26% the day after the earnings report, and the count of shares shorted jumped 43.5% in the month leading upward to May 16, co-ordinate to information provider S3 Partners. “Yesterday was Money’s day of reckoning,” Mizuho senior analyst Dan Dolev wrote afterwards that calendar week.

The stock’s struggles are not expected to ease up anytime soon, either. While Goldman Sachs analyst Will Nance called Coinbase “the bluish-chip fashion to gain exposure to the crypto native ecosystem” in a May note, the fact remains that most investors cannot seemingly exist persuaded to touch growth and run a risk-oriented stocks right now. And without crypto prices or volatility going back on the upswing, profitability is unlikely to return anytime presently, Nance wrote.

Over the long run, the fear is that Coinbase’s “best days are behind it,” Dolev says. Between new competition and loftier fees (at roughly i.3% of each transaction Coinbase’s fees are sometimes double that of competitors), Dolev warns that the visitor could exist on a trajectory not unlike that of TD Ameritrade and East*Trade. Those companies relied heavily on commission fees until they were forced to become to $0—and soon afterwards were acquired by larger competitors.

“We’re non modeling bankruptcy,” Dolev tells
Fortune. “Only if the crypto ice historic period continues, I think it’due south going to be very hard for their P&L.”

The company’s remainder sheet is relatively strong: Every bit of March 31 it had some $vi billion in cash and cash equivalents with another $1.three billion held in crypto avails (though the value of those would exist far lower today). And while the visitor currently tallies about $3.four billion in long-term debt, the nearest maturity engagement on any of that is in 2026.

That leaves
Coinbase
at a crossroads many a fledgling Fortune 500 visitor has faced. The engine that powered its growth is quickly turning into a article business, and to detect growth information technology must diversify. Coinbase has talked well-nigh the need to do then for years, and especially since going public in 2021. Looking forward, Choi thinks Coinbase’southward trading business will be akin to advertising at Meta or Alphabet: something that funds and powers the next wave of innovations.

What that side by side generation volition look like is nevertheless a work in progress. In the almost term, Coinbase is pulling back on some of its most aggressive strategies for 2022 with winter setting in. The visitor does non plan to triple its headcount this year any longer, for instance. Coinbase is reportedly going on a two-calendar week–long hiring freeze and cutting the amount of money it is spending on Amazon Web Services, while it works to accelerate its cadre businesses of trading, staking, and custody. “Discipline and prioritization have always been important values at Coinbase, and information technology is no surprise that they are now more than ever,” chief product officer Surojit Chatterjee wrote in a tweet after the report was released.

Just Coinbase does ultimately still want to become an on-ramp to more than than just crypto. The company has its eyes set on Web3 in particular, the buzzwordy blockchain-congenital version of the internet that Chatterjee defines as being a world online where users tin can read, write, and ain their ain information and information rather than some faceless corporate giant. So, to do that, Coinbase has been building out newer product lines like an NFT market that was recently rolled out in beta. Coinbase is undoubtedly facing stiff competition on the NFT side, especially considering its slow showtime versus industry leader OpenSea. But Coinbase hopes to carve out a more unique approach to NFTs than simply digital art, with music and existent manor continuing out as two potential areas, executives say.

Chatterjee sees the visitor’s Wallet becoming a manner for Web3 users to store different tokens they collect from participating in unlike DeFi protocols, decentralized social media platforms, or otherwise. The company is also building out Coinbase Deject, which will provide developers APIs and blockchain infrastructure to launch crypto projects. Coinbase Ventures, the visitor’s VC leg, backed 37 firms in the first quarter—virtually xx of which were in fintech—making it the most active corporate VC effectually, according to CB Insights.

Coinbase certainly still has its bulls. Ehrsam gobbled up more than than 5 million shares in the company’s stock in May, and Cathie Forest’s ARK Invest bought about 550,000 shares the day after its get-go-quarter earnings report. “There is an entirely new economic system being built on the blockchain,” notes Devin Ryan, the director of fintech research at Citizens Fiscal–endemic JMP Securities, who has a $250 price target on the stock. “In that location’s not many firms that accept a meliorate view of where the puck is going than Coinbase.” How those ambitions square with the current market place reality depends in big role on how deep—and how long—the crypto wintertime is. And of course, which crypto company monetizes Web3, you lot guessed it, get-go.

This article appears in the June/July 2022 upshot of
Fortune
with the headline, “The crypto wintertime is coming for Coinbase.”