Between The Rock And a Hard Place: Coinbase Misadventures

Coinbase is one of the most popular cryptocurrency exchanges in the cryptoverse. According to The Block, the number of estimated visitors in November was 25 million (the second place after Binance). At the first sight, it might look like everything is fine and dandy down at the Coinbase land. However the company is getting far too much flak for that to be true.

Recently the exchange has announced addition of thirty new assets to their portfolio. This news provoked negative reaction of some prominent community members. Gabor Gurbacs, the chief digital assets strategist at VanEck, labeled new assets as “shitcoins”. Larry Cermak, head analyst at the Block, mentioned a relation between listing of unreliable assets and lowering trading volumes of the exchange. He predicted a dramatic plunge of Coinbase revenues in 2019 that would end up being a disaster.

Accessibility of the exchange for the crypto-assets creates another serious issue. Right now all you need to get on the platform is getting approved after filling out an application form created inside of a Google Document. Sure, the exchange administration is promising that obviously useless assets are not going to get listed, but right now - they and their outright primitive and unreliable form of application is a laughing stock of the crypto community.

It’s not only about their outlook for the clients. The exchange is getting sued under the pretense of insider trading. Exactly one year ago, when the platform launched Bitcoin Cash trading, the coin’s price jumped up to extreme levels, so Coinbase had to pause trading in a few minutes after the very start. Now, a number of traders is suspecting that a foul play is involved: they claim that the company has stroke an arrangement with a number of affiliated traders, that were selling BCH at the inflated price. In March 2018 federal judge dismissed such a lawsuit, but plaintiffs aren’t ready to forget about it.

But it would’ve been wrong to keep mentioning Coinbase issues without talking about their  achievements. Despite prolonged bear trends on the market, this summer some media have reported about Coinbase had taken on an unnamed $20 billion hedge fund.

Later on other media outlets started to spread a rumor that Coinbase is about to go IPO. Although Asiff Hirji, the president of the company, had denied the rumor and said: “There’s not going to be an IPO any time soon.” Despite it, the trading platform still involves investments from concerned companies.

Further news about their deals with Tiger Global, New-York based investing company, has reached the media. With its help the crypto-exchange aimed to raise half-billion dollar investment. But after the end of the investing round they reported about adding $300 mln, less than the stated purpose.

As Asiff Hirji announced, the company is going to use this financing for building the infrastructure, adding new assets to the platform, developing new applications and bringing institutions into the industry. But there is a catch. Сompany officials haven’t mentioned what part of the gathered money is going to their coffers and how much of it is going into the pockets of existing investors.

Noticeably lower result of investing round can be explained by the situation on the market that is heavily influenced by the bear trends, and Coinbase current state is a clear reflexion. The exchange’s trading volume of the platform decreased by 44% ($7,8 bln) to $10,1 bln.

Michael LEE, doctor of economic sciences and co-founder of a fintech company, links the decline in trading volume with the regulation of the industry: “I believe exchanges lowering volume is about building credibility with the regulatory in one hand, while on the other hand - combating money laundering and building so with acceptance by institutional investors and institutional banking sector.” Michael LEE expects further lowering of trading volume in the last quarter of the year. The same opinion is shared by some other analysts. According to Bloomberg, expected revenues in 2018 is $1,3 bln, projecting profit is about $456 mln.

Meanwhile the company’s margin gains decreased too. It fell as much as 35,3%, while the last year parameter was 41,2%. This fact can be explained by a rapid increase of staff. Coinbase staff grew from 250 to more than 500, and the platform kept on hiring. This process is a clear indication of their plans for the further expansion.

Officers of the platform are subjects of staffing changes as well. Two top managers have left the company this autumn. In October, Adam White, one of the first Coinbase employees who had been working for the platform since 2013 left the company. He was the head of the institutional platform group. White’s departure may signify fundamental changes in the approach to corporate clients in the new market realities.

One month later Michael Lempres, the firm’s policy officer, have also left the exchange. His new employer is Andreessen Horowitz, venture capital firm that was an early investor in Coinbase. Brian Brooks is going to take over Lempres’ position as, someone who is forming company’s policies while US attempts to form a new regulatory framework.

The Coinbase is in a tough spot right now. The exchange is risking to lose their reputation in the face of lawsuit and communities suspicion when it comes to the new assets. Those grim predictions are backed up by the expert opinions. But at the same time, venture investors are still ready to invest in the company. “Coinbase is standing in a very good position through the partnership with Tiger Global and the change of listing, - Michael LEE considers, - but at the same time now they will be challenged on their technology stability and security more than ever before.”

Institutional clients may help the exchange to become a middle ground between conventional financial system and the digital one. This strategy, combined with simplified access to the asset  listing, serves as a meeting hub for retail investors and well established participants of financial market. But this whole situation requires very careful decisions from the platform, as Coinbase management is in dire need to please the both sides.