Coinbase Basics for the Newbies - How Long Until Disaster Strikes & Genesis
Level 1 - NGMI
Welcome Avatar! As mentioned many times since the IPO date, owning Coinbase or COIN 0.00 stock guarantees that you have $0 in crypto exposure. We’ve spent the last 18 months dunking on it but apparently they have a real shot of going bankrupt. In this post we’re going to go through the financial statements and provide a rough estimate on how long it would take for them to go under.
For now, we put the probability at next to nothing *near-term*. However. Read this post to follow along and see when things could potentially blow up.
The above was from April 14, 2021.
The stock peaked at around $380 and is now down to $40 which is a hilarious/comical 89.4% decline.
Part 1 - Does Coinbase Make Money
Once again. If you use things like google finance or yahoo finance to get the “P/E” multiple then you’re not getting good information. All of those products have lazy feeds that are rarely accurate. For this you’re going to to have to get your hands dirty and click the boring old “SEC.GOV” link.
Step 1 - Why Is it Losing Money?
As you can see, the easiest way to evaluate COIN right now is by looking at the 9-months ended number in the far right of the screenshot. As you can see they lost ~$2,068M in the past 9 months (third column bottom figure).
The reason for this is clear with the first column “total revenue” which is $590M. This is down around -55% when compared to the prior year which registered a massive $1,312M.
Step 2 - Confirm it is Bleeding Cash
Not going to get into financial statement analysis in detail. Instead we can just look at the cash flow statement and focus on CFO “Cash flows from Operations”. This is good enough for what people on Twitter want to see.
The image here is bad but you can see it here on page 10 - Source
At this point we have a good range of outcomes. They are losing About $2,068 every 9 months or around $689M a quarter (net loss from income statement). From a cash flow from operations number it is worse around $4,817M every 9 months or about $1,605M.
Make it simple: We’re going to give the company the benefit of the doubt and say they are losing around $750M in cash per quarter. This is slightly above the net loss and massively below the current numbers from cash from ops. Once again, no need to overthink this for now.
Step 3 - Balance Sheet
Okay, we know they are losing about $750M a quarter. How long can you dip into your checking/savings account and rip out $750M? Well, luckily the balance sheet has the answer. 10-Q shows they have $5,006M in cash *and* $3,391M in debt (bottom and top figures) - source page 5
Step 4 - Quick Calculations
They actually have a lot of time! If you simply run this math you can figure it out easily. They have about $5,000M in cash. We know that they are losing $750M a quarter which *includes* the interest payments on the debt. And. That gets us to about 6.66 quarter of run-way (keep it simple and say 6.5 quarters or 21 months)
Note: Emphasis on phrase “quick calculation” we’re just creating easy metrics to think about.
Step 5 - The “Bull Case”
Since they have time to adapt they can make a lot of changes. They can fire tons of people. Shut down their failed NFT project and likely reduce costs significantly. If we were to guess, the trading business and volumes on Coinbase are not going to recover this quarter (people scared of FTX). Customers who have done basic research will take their money off Coinbase and put it into a hardware wallet.
Anyone else who is “scared of crypto” will sell and unlikely return for years (until they hear about the next dog coin).
There is just no way they should be spending around $400M on general and administrative expenses (see last 9 months in the income statement). So. Go ahead and assume the cash burn can be reduced by at least $250M. That would get them to $500M cash burn versus $5,000M on the balance sheet. This would give them 10 quarters instead of 6.5 quite easily.
Note: You could also have a major firm like Fidelity purchase the company if things get really ugly. Since the transaction business (buy and sell taking 1%) is easy to turn into a profit center. There is always going to be some value in pieces of the business. The NFT debacle? Not so much.
Step 6 - The “Bear Case”
No need for Fairy Tales! Anyone who watched all of this go down has to know that regulation is coming. What does regulation mean? It always means more costs, more headaches, more lawsuits and more expenses. There is no way you “regulate” an industry that causes costs to go down. Absolutely no way.
The second part (for someone who cares to look)? There are likely debt covenants and other triggers for the debt. Since we’re in an environment where raising money is difficult (high rates), it is unlikely that they refinance at a low cost.
Note: as a point of emphasis, we just went through the basic numbers. If there are debt triggers and other payment issues the timeline accelerates materially.
For fun below is a poll where you can guess what happens (first use of this in Substack!)
For those Confused by the Summary: If you don’t have a Wall Street background and want to learn how to read basic financial statements you can do so by following this series on Basic Finance 101: 1) Income Statement , 2) Balance Sheet and Cash Flow and 3) Basic Value of a Company.
Part 2 - Genesis Debacle
Being on Crypto Twitter is just news after news. Initially, the claim was that a $1B+ hole was present. Then an article came out saying they were going to file for bankruptcy. Then a Genesis spokes person came out and said that is not true (source). This leads to the latest speculation that the hole is $500M
Incentives: This side of the web has a heavy cynical take for a reason. In the business world, incentives drive everything. Don’t assume that companies will act like your rich aunt or great grand father. There are no family ties in a capitalistic world.
Therefore, there are many suggestions on twitter: 1) they try to raise money from someone - Apollo and CZ were mentioned, 2) they try to sell their GBTC stake that they were buying last year - now at a major loss and 3) they can go and try to dissolve and sell the underlying BTC at Grayscale.
None of these are appealing for a wide variety of reasons. That said, the most likely scenario is that the GBTC they own would be sold to cover the hole or they find a way to raise money from someone else.
Grayscale Untouched: Generally speaking, you don’t want to sell your golden cash making business. The GBTC product charges a fee based on AUM not on the market cap of GBTC. So they are collecting 2% on $10B = $200M (AUM source here). Most are confusing this number with the market cap which is much lower than $10B due to the current large discount.
Conclusion: Most likely scenario? Someone steps in to buy and secondly any sellable assets (such as GBTC itself) is sold to cover the hole.
Highly unlikely that DCG would want to get rid of its massive cash generative business. We’ve seen crazier things but that’s the current scenario we see playing out.
Either raise or sell assets to cover the hole.
If you have questions related to Coinbase leave them here.
For GBTC/Genesis stuff please wait on that for another post since no one knows exactly how it will shake out. We went from “limited exposure rumors” to needing $500M in less than a couple of weeks.
Safe to say no one knows until something official happens.
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce. We’re an advisor for Synapse Protocol and on the JPEG team. Currently homeless.
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Looking through Coinbase’s financials, the easiest cut is the 4,756 employees at 3q22, up from 2,781 at 3q21. Could also roll back technology spend back to 2021 levels, maybe.
Given their debt is bonds, they have at least 6 quarters to right the ship before they burn through their cash. No need to worry about covenants - even tho cov-light structures today make it almost impossible to default on TLs.
Doesn't bode well that CEO Brian Armstrong sold 100% of his $COIN stock on Nov 11.
What's it mean when the founder/CEO isn't exposed to his own company's share price?