What is wrong with Coinbase? CEO selling 2% of stake

Put an arm round a Coinbase investor in the present day.

CEO and founder Brian Armstrong has introduced he’s promoting 2% of his stake, in what quantities to a different blow to the embattled cryptocurrency change.

Coinbase going public was seminal second for crypto

Coinbase, which is the world’s second-largest cryptocurrency change, was the guinea pig for crypto.

The corporate eschewed the standard route – the IPO – and as an alternative pursued a direct itemizing, when its shares floated on the Nasdaq inventory change in April 2021. However it wasn’t merely the strategy of itemizing that was considerably novel; it was the very fact it was going public within the first place.

It represented crypto taking its seat at the big table. No crypto firm had earlier than gone public, and it got here amid a time when each coin underneath the solar was yielding outrageous returns for buyers.  

It appears a very long time in the past now. Bitcoin opened at $59,000 that morning. Jerome Powell’s printer was crimson sizzling. Boomers have been asking their kids purchase one thing referred to as Dogecoin.

Coinbase went public that morning, and closed its first day of buying and selling at $328 per share. That valued the crypto behemoth at near $86 billion. The nice occasions have been rolling.  

Crypto had arrived.

Efficiency since IPO

And simply as quickly as Coinbase arrived, it fell.

As I write this, it’s buying and selling at $63. That’s an 83% meltdown from its itemizing, now valued at $16.6 billion. Even the wounded Bitcoin has outperformed it since then, as I plotted under.

So the place did all of it go fallacious? Properly, I suppose the very first thing is the volatility. We shouldn’t be shocked {that a} share corresponding to Coinbase is able to shedding a lot worth so shortly. Its efficiency is – and at all times shall be – symbiotic with crypto.

If crypto drops, curiosity within the markets plummets. Everyone needs in when their buddies are tweeting about 100X returns. Meaning much less quantity, buying and selling charges and finally worse efficiency for Coinbase.

With crypto’s peerless volatility, it shouldn’t be a shock that Coinbase is so unstable. This was what I stated on the time about it: it is sensible to purchase Coinbase inventory if you’re an institutional investor searching for crypto and for no matter causes – regulatory, forms and many others – you can’t buy Bitcoin straight.

Or maybe you’re an older investor, (understandably) intimidated or not as snug transacting within the crypto markets straight, as regards to self-custody / establishing a pockets and many others. For this demographic, if trying to acquire crypto publicity, it made (makes) sense to buy Coinbase inventory.

Nevertheless, for anybody else, why not simply purchase Bitcoin straight? Why go through the Coinbase route; what benefit does it maintain?

CEO sells 2% of stake

Founder and CEO Brian Armstrong holds a 19% stake within the firm, value about $3.2 billion. Quickly, that shall be a 17% stake, following his announcement he’s promoting some.

“I’m obsessed with accelerating science and tech to assist resolve a number of the greatest challenges on the earth. To additional this, I’m planning to promote about 2% of my Coinbase holdings over the subsequent 12 months to fund scientific analysis and corporations like NewLimit + ResearchHub”

His causes appear sound, in equity. Nevertheless, it doesn’t matter what means you swing this, it’s a blow to Coinbase to have their CEO dump inventory – similar to it’s a blow when any insider sells.

Positive, there are private the explanation why one might wish to divest – I actually wouldn’t wish to have 19% inventory as a part of my portfolio – however the reasoning by Armstrong that he needs the cash to donate doesn’t change the truth that that is nonetheless a promote order by Coinbase’s CEO.

There are a lot of methods to monetise inventory holdings, which executives benefit from on a regular basis. Look no additional than Elon Musk, who’s famously reluctant to promote Tesla inventory, as an alternative putting it as collateral in financing packages, or utilizing different avenues to generate money stream.

Armstrong posted his promote order final Friday on Twitter, appending it with the remark that’s “sharing this as a result of he needs you to listen to it from me first”, earlier than insisting that “I intend to be CEO of Coinbase for a really very long time and I stay tremendous bullish on crypto and Coinbase”. 

For the avoidance of doubt, I intend to be CEO of Coinbase for a really very long time and I stay tremendous bullish on crypto and Coinbase. I’m absolutely devoted to rising our enterprise and advancing our mission, however I’m additionally excited to contribute otherwise.

— Brian Armstrong (@brian_armstrong) October 15, 2022

The longer term for Coinbase

That is simply the most recent blow for Coinbase.

In June, Armstrong introduced the corporate can be shedding 18% of its workforce, roughly 1,100 of its 6,100 workers, because the crypto markets continued to lag, hurting Coinbase’s backside line. For comparability, its competitor FTX, which overtook Coinbase in Could for buying and selling quantity for the primary time, nonetheless has an worker rely of solely 300.  

The downsizing additionally got here solely 4 months after the SuperBowl, when Coinbase notoriously spent $14 million on a halftime industrial. It posted a internet loss that quarter of $430 million, with shares sliding 36% – and this was earlier than the immense contagion sparked in Could that basically took the crypto markets for a tailspin.

Armstrong admitted the corporate had expanded too shortly, however it was actually a case of extraordinarily poor planning. The crypto markets are famously temperamental, and with the pandemic growth resulting in stimulus cheques, extra disposable revenue for these locked at residence, and extra time on the pc given the shortage of socialising and results of quarantine, the 2020 and 2021 markets have been the right cocktail for a Coinbase run-up.

Armstrong guess huge on this persevering with, however the world had different concepts. Inflation finally got here to chunk, following extra printing of money than at any level in historical past. And with rampant inflation comes rate of interest hikes, sucking liquidity out of the markets, bloated beneficial properties disappearing from shares, and ahead cashflows getting discounted at harsher charges.

It’s now the precise reverse of that excellent COVID macro state of affairs. Coinbase might want to consolidate, plan higher and hope that the financial system can get its act collectively. As a result of crypto shouldn’t be bouncing till that occurs. And if crypto doesn’t bounce, Coinbase actually received’t.

The canine wags the tail, don’t you realize?