Coinbase Q1/22 Shareholder Letter [pdf](s27.q4cdn.com)
s27.q4cdn.com
Coinbase Q1/22 Shareholder Letter [pdf]
https://s27.q4cdn.com/397450999/files/doc_financials/2022/q1/Coinbase-Q122-Shareholder-Letter.pdf
81 comments
I think we really could be witnessing the start of the end of massive compensation packages for many engineers. Turns out that easy money propped up the valuations of companies with marginal business models, and there just aren't that many companies out there like MAGMA that make money hand over fist and can keep growing YOY like crazy. MAGMA comp will stay high for the forseeable future, but I think a lot of people are going to take a big paycut here in the next year or two.
Layoffs? Maybe. Paycut? Not at their existing companies. There's a case to be made that too many tech companies scaled too quickly. Fundamentally, Coinbase is still a solid company, they may have overextended hiring but their core businesses are very profitable.
Revenue is down to $1.165bn compared to $2.49bn in Q4/2021.
$430m loss, compared to income of $840m in Q4/2021.
$430m loss, compared to income of $840m in Q4/2021.
Massive earnings miss.
Yesterday some people were arguing in another HN thread that Coinbase stock is a bargain because of the low P/E. That nice ratio is negative now.
Yesterday some people were arguing in another HN thread that Coinbase stock is a bargain because of the low P/E. That nice ratio is negative now.
If you're looking at trailing 12-months it isn't negative yet. I can't predict the future so I don't know if they're going to continue losing money or if this is just one negative quarter.
I don't know much about what is "hot" in crypto exchanges, but FTX is saturating sports commercials and getting high-profile endorsers like Steph Curry and Tom Brady and sponsoring the Miami Heat arena. Crypto.com has the naming rights for the area that hosts the LA Lakers, LA Clippers, LA Kings, and LA Sparks as well as sponsorships of the Philly 76ers, Montreal Canadiens, UFC, and the 2022 FIFA World Cup.
Even if you believe strongly in crypto, Coinbase seems to be losing mindshare to competitors who are spending big. While some marketing spending might be considered foolish by some (I already know that Gillette exists and generally know what razors are available), with crypto they're probably targeting a lot of customer acquisition in a very new market. If FTX and Crypto.com become the faces of crypto to every sports fan looking to buy crypto, that seems like it would be a problem for Coinbase.
Coinbase might be better or worse than those other two, but as someone who has been watching sports I can tell you that FTX and Crypto.com are very front-and-center. If crypto is looking to attract lots of new buyers, it seems like FTX and Crypto.com are doing the marketing to make them first in people's heads.
I don't know much about what is "hot" in crypto exchanges, but FTX is saturating sports commercials and getting high-profile endorsers like Steph Curry and Tom Brady and sponsoring the Miami Heat arena. Crypto.com has the naming rights for the area that hosts the LA Lakers, LA Clippers, LA Kings, and LA Sparks as well as sponsorships of the Philly 76ers, Montreal Canadiens, UFC, and the 2022 FIFA World Cup.
Even if you believe strongly in crypto, Coinbase seems to be losing mindshare to competitors who are spending big. While some marketing spending might be considered foolish by some (I already know that Gillette exists and generally know what razors are available), with crypto they're probably targeting a lot of customer acquisition in a very new market. If FTX and Crypto.com become the faces of crypto to every sports fan looking to buy crypto, that seems like it would be a problem for Coinbase.
Coinbase might be better or worse than those other two, but as someone who has been watching sports I can tell you that FTX and Crypto.com are very front-and-center. If crypto is looking to attract lots of new buyers, it seems like FTX and Crypto.com are doing the marketing to make them first in people's heads.
Judging by the report, Coinbase is going after more institutional investors with 17% SME, given they are $235/209 B of trading volume. I don't blame them - retail is even more finicky, and I won't be surprised when FTX and Crypto.com have been supplanted with something else in 10 years. Though I would just avoid this industry all together!
I could definitely see FTX and Crypto.com not having staying power - many companies that spend lavishly on sports sponsorships see it come back to bite them. However, over the next few years it seems likely that FTX and Crypto.com will win a lot of the growth coming from non-techies. That's not great for Coinbase.
I'm a bit skeptical of the institutional play. $47M in institutional transaction revenue is a lot lower than the $966M in retail - even after retail took a nose-dive from $2.2B. Plus, institutional revenue also seems to have taken a nose-dive from $91M to $47M. It seems like institutional investors are being just as fickle.
Notably, it doesn't seem like retail is souring on Coinbase. They have $123B in retail assets which is down from $141B in Q4'21, but up from $116B/$88B/$101B in Q3/Q2/Q1 2021. Their institutional accounts are pretty steady at $122, $92, $139, $137, $134B for the past 5 quarters, but it's not like their retail assets aren't pretty stable.
It does seem like people (retail and institutional) aren't transacting as much. Transactional revenue is down 56% and trading volume is down 44% (which probably accounts for most of the drop in transactional revenue).
If their business model is based off transactions and people are buying and holding their crypto, that's not a great position for Coinbase.
As I've said in another comment, I'm definitely not an authority on what is hot in crypto exchanges, but I'm skeptical they'll be able to get enough revenue from institutional investors where they're getting $47M in transaction revenue for $235B in transaction volume while they're getting $966M in transaction revenue on $74B in volume from retail. That's 0.02% from institutional and 1.3% from retail. That is a humongous difference in the fees there. If they did $2.3T in transactions for institutional, would they only get $470M in transaction revenue? A 10x increase in transactions while still being half of retail revenue?
Similarly, I'm avoiding the industry. There's too much uncertainty for me. Maybe people are just holding their Bitcoin, but will return to transacting in the near future. Maybe we're going to see long-term lower volume. Who knows.
I'm a bit skeptical of the institutional play. $47M in institutional transaction revenue is a lot lower than the $966M in retail - even after retail took a nose-dive from $2.2B. Plus, institutional revenue also seems to have taken a nose-dive from $91M to $47M. It seems like institutional investors are being just as fickle.
Notably, it doesn't seem like retail is souring on Coinbase. They have $123B in retail assets which is down from $141B in Q4'21, but up from $116B/$88B/$101B in Q3/Q2/Q1 2021. Their institutional accounts are pretty steady at $122, $92, $139, $137, $134B for the past 5 quarters, but it's not like their retail assets aren't pretty stable.
It does seem like people (retail and institutional) aren't transacting as much. Transactional revenue is down 56% and trading volume is down 44% (which probably accounts for most of the drop in transactional revenue).
If their business model is based off transactions and people are buying and holding their crypto, that's not a great position for Coinbase.
As I've said in another comment, I'm definitely not an authority on what is hot in crypto exchanges, but I'm skeptical they'll be able to get enough revenue from institutional investors where they're getting $47M in transaction revenue for $235B in transaction volume while they're getting $966M in transaction revenue on $74B in volume from retail. That's 0.02% from institutional and 1.3% from retail. That is a humongous difference in the fees there. If they did $2.3T in transactions for institutional, would they only get $470M in transaction revenue? A 10x increase in transactions while still being half of retail revenue?
Similarly, I'm avoiding the industry. There's too much uncertainty for me. Maybe people are just holding their Bitcoin, but will return to transacting in the near future. Maybe we're going to see long-term lower volume. Who knows.
A drop in retail assets north of 10% in a quarter does not sound like stability to me, especially for a company spending like they are in hyper growth mode. It sounds more like an existential risk to the business.
FTX is literally everywhere.
Well perhaps they should have listened to my warning that I outlined [0] rather than buying on the direct listing price of >$400 a share on the first day.
As I said before, it looks like the real winners were the VCs, founders and the early employees who sold at the peak.
Now retail bought in and got dumped on and bag-holding at the top. Just like buying Bitcoin at $69,000 once again.
[0] https://news.ycombinator.com/item?id=31322018
As I said before, it looks like the real winners were the VCs, founders and the early employees who sold at the peak.
Now retail bought in and got dumped on and bag-holding at the top. Just like buying Bitcoin at $69,000 once again.
[0] https://news.ycombinator.com/item?id=31322018
Transaction fees are typically a percentage, so all things being equal, it makes sense their revenue would be half given crypto being worth half of what it was several months ago.
How are they spending so much that they have a $430M loss with $1.165B revenue? I don't mean that as a judgement, I'm just actually wondering.
Transaction expense eats 24% of their revenue ($278M). Sales and marketing eats 17% ($200M). Technology and development eats $571M. General and Administrative eats $414M. Other expenses eats $259M. In total, $1.721B in operating expenses. They have nearly 5,000 employees.
As axg11 noted, they're building lots of new things. As I noted in another comment, they probably need to step up their marketing given how Crypto.com and FTX are saturating sports with their names.
If you're trying to grow a new platform with ever-changing things customers want while managing over $20B and have 9.2M monthly transacting users, it's going to cost a bunch. Could they be more efficient? Maybe. However, being more efficient might mean missing out on the Next Big Thing. One could argue an "efficient" company wouldn't have created Coinbase in the first place - a company catering to some upstart electronic token nonsense when they could be putting their energy into something people want. And in 2014/2015 it looks like Bitcoin didn't do anything amazing (Coinbase was founded in 2012, but my BTC-USD chart only goes back to 2014). It was late-2017 when we saw the spike to $19,000 and 2020 was really the first year it stayed over $10k most of the time.
So they need to spend a decent amount on R&D to basically make sure what they're doing is still the next big thing. If you just wanted to create a company making money, you could start a bank. Coinbase is trying to be a future of finance and investing - and no matter how much you believe in crypto, you don't know exactly what that future is. Coinbase needs to make sure they have a finger in every little pie and that costs money.
As axg11 noted, they're building lots of new things. As I noted in another comment, they probably need to step up their marketing given how Crypto.com and FTX are saturating sports with their names.
If you're trying to grow a new platform with ever-changing things customers want while managing over $20B and have 9.2M monthly transacting users, it's going to cost a bunch. Could they be more efficient? Maybe. However, being more efficient might mean missing out on the Next Big Thing. One could argue an "efficient" company wouldn't have created Coinbase in the first place - a company catering to some upstart electronic token nonsense when they could be putting their energy into something people want. And in 2014/2015 it looks like Bitcoin didn't do anything amazing (Coinbase was founded in 2012, but my BTC-USD chart only goes back to 2014). It was late-2017 when we saw the spike to $19,000 and 2020 was really the first year it stayed over $10k most of the time.
So they need to spend a decent amount on R&D to basically make sure what they're doing is still the next big thing. If you just wanted to create a company making money, you could start a bank. Coinbase is trying to be a future of finance and investing - and no matter how much you believe in crypto, you don't know exactly what that future is. Coinbase needs to make sure they have a finger in every little pie and that costs money.
They are trying to do everything:
- Professional trading platform (Coinbase Pro)
- On-ramp for the masses (Coinbase)
- NFT marketplace (Coinbase NFT)
- web3 infrastructure (Coinbase Cloud)
- Debit card w/ crypto rewards (Coinbase Card)
- Crypto for businesses (Coinbase Institutional / Coinbase Custody)
Each of these is a huge undertaking, often across multiple different markets across the globe.
- Professional trading platform (Coinbase Pro)
- On-ramp for the masses (Coinbase)
- NFT marketplace (Coinbase NFT)
- web3 infrastructure (Coinbase Cloud)
- Debit card w/ crypto rewards (Coinbase Card)
- Crypto for businesses (Coinbase Institutional / Coinbase Custody)
Each of these is a huge undertaking, often across multiple different markets across the globe.
Is there any evidence any of these bets have traction? I have only heard of their NFT platform performing unbelievably badly:
https://decrypt.co/99561/coinbase-nft-marketplace-150-users-...
https://decrypt.co/99561/coinbase-nft-marketplace-150-users-...
Coinbase is an atypical "tech" company to analyze because they're kind of like a bank: much of their asset sheet is driven by customer deposits. Apparently $738m of customer funds were withdrawn from Coinbase in the last 3 months. This is in comparison to an inflow of $2.35bn (!) in 21Q1.
As for expenses, there is a usual culprit in the $352m of stock-based comp. There's a large impairment expense of $229m, which is caused by their crypto asset holdings. Together, those make up $600m, and don't involve the transfer of money.
> Under GAAP, we are required to record impairment charges on our crypto assets held when the price falls below its cost basis.
FWIW they went from $17.6bn cash on hand to $16.1bn cash on hand.
As for expenses, there is a usual culprit in the $352m of stock-based comp. There's a large impairment expense of $229m, which is caused by their crypto asset holdings. Together, those make up $600m, and don't involve the transfer of money.
> Under GAAP, we are required to record impairment charges on our crypto assets held when the price falls below its cost basis.
FWIW they went from $17.6bn cash on hand to $16.1bn cash on hand.
Citation? I'm not sure how withdrawing of funds would be considered an operating loss. That's not how banks work either.
You're right; I'm sorry, I misread. It doesn't count as an operating loss, because it's not counted as revenue. It's counted as an asset/liability, not an expense/revenue, updated my original comment.
Is that cash cash or does it include crypto they own?
It's cash cash, but $10bn is in custodial accounts for customers and $6.1bn is of it is actually "usable" for cash expenses.
The $6.1bn figure comes after a decline of $762m of their own "usable cash cash" this quarter.
Obviously not desirable, but who knows how crypto will play out.
The $6.1bn figure comes after a decline of $762m of their own "usable cash cash" this quarter.
Obviously not desirable, but who knows how crypto will play out.
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Given their headcount of 4k with the usual engineering salaries and some infrastructure it's not that surprising I would say.
edit: misread your question - removed the stupid joke.
edit: misread your question - removed the stupid joke.
That just means they're spending about the same they spent in Q4.
What would happen if Coinbase went bankrupt? That would be rather catastrophic to the Crypto market wouldn't it? Do they have any obligation to give people access to "their" crypto wallets?
On Coinbase’s website they have this : https://help.coinbase.com/en/coinbase/other-topics/legal-pol...
What's Coinbase's share of stored crypto relative to Mt. Gox's when it declared bankruptcy?
As for obligations, each customer would be a creditor of Coinbase, and have the same claims as any other creditor.
As for obligations, each customer would be a creditor of Coinbase, and have the same claims as any other creditor.
It would hurt the market but keep in mind they only handle 11% of crypto trading.
They also have ~$6b in cash and are well managed, so going bankrupt any time soon doesn't seem likely.
They also have ~$6b in cash and are well managed, so going bankrupt any time soon doesn't seem likely.
Nothing. Unless there's outright fraud those wallets will still exist regardless of the company's health. It's no different than any other traditional broker going out of business (which isn't common but does happen). People can just transfer their funds elsewhere.
"Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors"
That's from Coinbase's 10-Q filing (https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/89c60d8...). I don't necessarily think it's likely that customers would be treated as unsecured creditors, but it is possible as they note. At the very least, it seems likely that a court would need to determine (over the course of months) whether to release the crypto assets to the account holders. It seems likely that it wouldn't be as orderly as a traditional broker going out of business given that it's new ground to litigate. I do agree that it probably should be treated like any other broker, but I think there's a decent chance it'll take some time to work through courts.
Coinbase has $256B in assets on its platform. I think its creditors would certainly see value in trying to claim that the crypto isn't like stocks or bonds held at a brokerage - enough value to tie it up for a good while with appeals.
They also note that the theft or loss of private keys is a risk and they note that the value of crypto assets held by them is far greater than what they're insured for. While I'm sure Coinbase invests a lot in security, there's a lot of risk in transactions that can't be un-done. If an employee transfers money at a bank, the government and banks can un-do the transactions most of the time.
Again, I'm not saying these are likely scenarios, but there's certainly risk as a Coinbase customer.
That's from Coinbase's 10-Q filing (https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/89c60d8...). I don't necessarily think it's likely that customers would be treated as unsecured creditors, but it is possible as they note. At the very least, it seems likely that a court would need to determine (over the course of months) whether to release the crypto assets to the account holders. It seems likely that it wouldn't be as orderly as a traditional broker going out of business given that it's new ground to litigate. I do agree that it probably should be treated like any other broker, but I think there's a decent chance it'll take some time to work through courts.
Coinbase has $256B in assets on its platform. I think its creditors would certainly see value in trying to claim that the crypto isn't like stocks or bonds held at a brokerage - enough value to tie it up for a good while with appeals.
They also note that the theft or loss of private keys is a risk and they note that the value of crypto assets held by them is far greater than what they're insured for. While I'm sure Coinbase invests a lot in security, there's a lot of risk in transactions that can't be un-done. If an employee transfers money at a bank, the government and banks can un-do the transactions most of the time.
Again, I'm not saying these are likely scenarios, but there's certainly risk as a Coinbase customer.
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>It's no different than any other traditional broker going out of business (which isn't common but does happen).
There are tested procedures in place that are know to work when dealing with traditional brokers. The crypto space doesn't really have such things.
There are tested procedures in place that are know to work when dealing with traditional brokers. The crypto space doesn't really have such things.
I don't fully understand how they have such high costs (G&A / Tech etc). Their revenue is actually fine / great. But these costs are wild - what makes up the bulk of these?
Anecdotally, I've seen many talented + experienced ($$$) people move over, so I would assume they've been paying top of market or close to it.
Interesting. Sort of makes sense, as the risks in the crypto business do seem higher than say sticking it out at Google etc.
I did read their letter and eyes glazed at their Coinbase NFT push. Kind of crazy that folks are making mid - high six figured to develop stuff like that
I did read their letter and eyes glazed at their Coinbase NFT push. Kind of crazy that folks are making mid - high six figured to develop stuff like that
When things are good you don't need to have any checks on spending. Poach engineers from FAANGs and pay them any salary they want. Hand out fat RSU packages to employees. Have no checks on expense reimbursements and discretionary spending by managers. Let your IT/infra costs balloon. Spend frivolously on sales and marketing without no measures or expectation of RoI.
It is inevitable that employees are going to (or already are) see a lot of tightening in all these areas now.
It is inevitable that employees are going to (or already are) see a lot of tightening in all these areas now.
Very high salaries.
Ridiculously high packages- I left a premier hedge fund last year, and right as the ink dried on the paperwork for my new role, a friend called me who I worked with in the past that landed a high up role there running a big revenue generating piece of their technology org, and I was like bud, its been awhile, I have been very fortunate, you might not be able to afford me... and he blew me away with comp about 50% higher than I had just signed for, and it wasn't one of those its all stock that vests in 4 year things, it vested I believe quarterly, with no restrictions to hold further. We are talking comp around the 7 figure range. Huge numbers.
Normal is a 4 year grant, with a 1year cliff, that is thereafter quarterly/monthly.
I'd have to look at my notes, but when they reached out they had just changed the schedule/vesting, but who knows may have changed it again since- this was a bit over 6 months ago. I just remember this is a big number that really had very few strings attached, which those big numbers often do. I felt no need to do an internal discount to what my real expected annual comp would be which I have pretty much always had to do when comparing offers in the past.
I think a lot of tech companies are going to start seeing this as a big problem. When you are hiring regular rank and file engineers at 500k you blow through money really fast. We'll see if the bean counters decide that controlling payroll costs is worth having a harder time hiring.
Is it though? How are stock grants counted? Yes, the big tech base salaries are higher, but the insane numbers people read typically include a very large stock component.
Someone else linked to levels for COIN and I saw mostly 100-200k base (some higher, but I doubt the company is mostly made of L7+ whatevers), but huge stock grants. The base seems perfectly reasonable for people working in a space where mistakes can cost significant amounts of money.
I think a bigger issue with big tech stocks sinking is top talent leaving to either do their own thing or take sabbaticals.
Someone else linked to levels for COIN and I saw mostly 100-200k base (some higher, but I doubt the company is mostly made of L7+ whatevers), but huge stock grants. The base seems perfectly reasonable for people working in a space where mistakes can cost significant amounts of money.
I think a bigger issue with big tech stocks sinking is top talent leaving to either do their own thing or take sabbaticals.
+1.. COIN trying to hire FAANG engineers so have to pay high salaries to attract them
Here's a reference point on their salaries for anyone curious: https://www.levels.fyi/company/Coinbase/salaries/Software-En...
You should start to think about how well capitalized your company is if you're working at a private fintech startup.
What does "how well capitalized your company" mean?
Basics like FCF from ops, cash in the bank, lines of credit...
Broadly, how much capital the company has. So I'd look at cash vs burn rate and get a sense of runway.
Maybe I'm misunderstanding this, but their report says they have $256 billion in "assets on platform". If the total crypto market cap is $1418 billion (according to coinmarketcap), does this mean they hold 18% of all crypto?
Users can also deposit USD and other fiat
Ah good call. I just found the section talking about this. It looks like 96% of "assets on platform" are crypto. So they hold about 17% of all crypto?
Down 80% since IPO – yikes. Seems like it is competing with Robinhood to be the worst performing fintech player out there.
I think Affirm takes the cake for 90% off ATH. $176 -> $18
Isn't -80% pretty typical for IPOs in the same time period?
No. I did a quick check on stocks that IPO'd in April 2021. In general, it's true that IPOs from then aren't doing well. Only about 12% are positive. COIN is still doing worse than most though. It's in the bottom ~28% from that time period.
What's the median?
IPO I don't know but compared to the 2021 peak, Cloudflare is basically down 75% too.
Rough time for quite some stocks.
Rough time for quite some stocks.
This blows my mind if true-
https://twitter.com/TheWinklerGroup/status/15241383296331325...
https://twitter.com/TheWinklerGroup/status/15241383296331325...
Coinbase stock is down 10% after hours, after being down 12.6% today.
after being down ~40% this week.
Are their numbers looking better now, a month after they literally robbed 20000+ Russian users of their money?
Did Coinbase seize users wallets?
They're not really wallets, they just look like it.
All wallets are Coinbase wallets.
All wallets are Coinbase wallets.
Sanctions are no joke when you run fintech. You can’t just choose to ignore them
I frankly don’t know what Coinbase has done since 2013. They just sat there and did not innovate.
What is their runway with current assets on hand?
They are paying 500k for developers that are just good at leetcode. Hemorrhaging money, convincing themselves they are hiring "top engineers". When are these companies going to learn.
The cryptocurrency industry consciously sells its product to the public using hype. Maybe the insiders believe their own nonsense.
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I had no idea Coinbase was paying so much. Even most of FAANG doesn't pay that much. My total comp when I was at AMZN after 5 years at the company circa 2019 came no way near 500k, and this was was with great reviews from both my manager and peers.
A lot of devs makes $400-$600K at big techs. Yes, comps have gone nuts since 2020.
Your figures are before 2020. Compensation has increased a lot.
I think the whole developer comp bubble is set to burst sadly. They were riding huge waves of equity grants and now they are crashing to earth. And I'm guessing a lot of these companies are realizing that the ROI for a $600K developer building REST APIs isn't there. I think once the dust settles, salaries will still be very high but not astronomic.
I imagine it will prove fascinating for economists to observe how well the down-stickiness of wages holds up.
Cash flow and assets look pretty bad compared to total liabilities.
Also, the statement "our outlook has not changed" is very ambiguous.
Horrible numbers, truly. A business modelo that rises and falls in harmony with the Bitcoin/eth pricing, this cannot end well.
Would be interesting to see the marking/affiliate cost breakdown over time.
Also, the statement "our outlook has not changed" is very ambiguous.
Horrible numbers, truly. A business modelo that rises and falls in harmony with the Bitcoin/eth pricing, this cannot end well.
Would be interesting to see the marking/affiliate cost breakdown over time.
The interest earnings figures (APY) were showing 0 for weeks, and have been incorrect ever since they returned.
Some of their services will randomly not load or show as "not available in your country" for a couple of hours or even days. Happens on their website, as well as their app and even their API.
Fiat out transactions are randomly blocked or delayed (fiat in transactions are A-OK, of course). Crypto transactions show as having gone through but end up never happening.
Whatever you contact support about, if you're lucky enough to get an answer, they basically tell you that either you're lying and whatever you claim never happened, or it was your own fault.
Already moved my assets out of CB a few weeks ago - not that it was a whole lot, but they've degraded so much in such a short amount of time that I wouldn't even trust them with a fiver.