Coinbase Q1/22 Shareholder Letter [pdf]

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.

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

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.

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.

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.

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.

That just means they're spending about the same they spent in Q4.

>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.

"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.

+1.. COIN trying to hire FAANG engineers so have to pay high salaries to attract them

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.

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.

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.

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

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.

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?

IPO I don't know but compared to the 2021 peak, Cloudflare is basically down 75% too.

Rough time for quite some stocks.

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.

They're not really wallets, they just look like it.

All wallets are Coinbase wallets.

Your figures are before 2020. Compensation has increased a lot.

A lot of devs makes $400-$600K at big techs. Yes, comps have gone nuts since 2020.

I think he was making around $5m per month... And he only needs $1.6m per year for the property taxes on his Bel Air estate.