If You're a Coinbase Shareholder, Prepare for a Disappointing Q2

Management expects weak market conditions seen during the first quarter to persist.

Coinbase Global, Inc., branded Coinbase, is an American company that operates a cryptocurrency exchange platform. Coinbase is a distributed company; all employees operate via remote work and the company lacks a physical headquarters. It is the largest cryptocurrency exchange in the United States by trading volume. The company was founded in 2012 by Brian Armstrong and Fred Ehrsam. Coinbase was founded in June 2012 by Brian Armstrong, a former Airbnb engineer. Armstrong enrolled in the Y Combinator startup incubator program and received a $150,000 cash infusion. Fred Ehrsam, a former Goldman Sachs trader, later joined as a co-founder. British programmer and Blockchain.info co-founder Ben Reeves was originally supposed to be part of the Coinbase founding team but parted ways with Armstrong just before the Y Combinator funding event, due to their different stands on how the Coinbase wallet should operate. The company is named after coinbase transactions, which are special transactions that introduce cryptocurrency into circulation in proof of work cryptocurrencies. 8  In October 2012 the company launched the services to buy and sell bitcoins through bank transfers.

The macroeconomic uncertainty today, characterized by skyrocketing inflation, higher interest rates, the war in Ukraine, and fears of a recession, has been a major headwind for the crypto market as investors seek safer assets to park their money in. And this situation has had an especially severe impact on Coinbase (COIN 16.02%), which just posted a 27% year-over-year drop in revenue and a net loss of $430 million.

Coinbase shareholders are feeling the pain, as the stock cratered over 40% in April alone. Investors should expect things to get worse before they get any better.

More pain for investors

From the start of April through May 12, the cryptocurrency market has been down roughly 39%. And this weakness caused Coinbase's management team, led by co-founder and CEO Brian Armstrong, to provide disappointing guidance for the second quarter.

They expect retail monthly transacting users (MTUs), defined as a user that transacts at least once on the platform during the prior 28-day period, to come in lower than the 9.2 million retail MTUs in the first quarter. Consequently, trading volume in Q2 will also be lower than the $309 billion registered in the period running from January through March. April's trading volume totaled just $74 billion.

Because Coinbase generated 87% of its overall net revenue from transaction fees in Q1, it's not difficult to comprehend that with fewer retail MTUs and less trading activity, the company's Q2 results will be worse than the quarter before. That means investors can probably expect continued losses on the income statement, particularly in light of the company's ongoing aggressive hiring spree.

The culprit, unsurprisingly, is the soft crypto market. Coinbase's business model thrives when both crypto asset prices and crypto volatility are high, as this encourages individuals and institutional customers to trade more often, resulting in greater revenue for the company. This is what happened in the fourth quarter of 2021, a record quarter for Coinbase.

However, with prices of digital assets falling, the opposite is true, and this scenario translates to poor performance metrics for Coinbase. If things reverse course and the crypto market turns things around during the remainder of May and throughout June, then Coinbase's financials could show a positive surprise.

But that's obviously an incredibly difficult thing to predict, so if you're a shareholder, it's best to listen to the management team and view an investment in Coinbase with an extremely long-term mindset. Focusing on the next decade, as opposed to trying to figure out what happens with crypto prices in the next quarter, is the right approach.

If you adopt this mentality, then the potential returns from owning Coinbase stock can be life-changing.