Coinbase Keeps Expanding Despite Financial, Regulatory Woes

These are dark days for cryptocurrencies, with a string of bankruptcy filings, lawsuits and investigations, not to mention the federal indictment of one-time crypto mogul Sam Bankman-Fried.

But the second largest crypto exchange by volume, embattled Coinbase, is still looking at expansion, even though it is dogged by numerous problems from U.S. regulators and depressed crypto prices. The digital bourse’s corporate parent, Coinbase Global Inc., lived up to its name Tuesday by launching an international derivatives exchange. This brings it into competition with the No. 1 crypto exchange, Binance.

Institutional investors generally have crypto exposure, but mainly it is small. One exception was Canadian pension fund Caisse de dépôt et placement du Québec, which last year suffered a 7.9% loss in its fiscal first half, partly due to crypto’s decline.

Coinbase will offer futures outside the U.S. to crypto traders. These are popular vehicles to hedge against losses or speculate on prices of the virtual coins. In the crypto realm, traders prefer permanent futures, which do not expire as conventional futures do, since the permanent futures permit traders to maintain their protection without constantly renewing contracts. The futures are available using up to five times leverage, settling in USD Coin, a stablecoin issued from Circle Internet Financial, a Coinbase partner.

The company brushes aside its detractors. Speaking at a Milken Institute conference on Tuesday, Emilie Choi, Coinbase’s president and chief operating officer, insisted that the 11-year-old company has surmounted five rough spells for crypto—which she called “crypto winters”—and emerged in good shape. “We made a lot of acquisitions” amid those downturns, she said. In March, Coinbase bought One River Digital Asset Management, a digital asset manager and investment adviser, for an undisclosed sum.

Coinbase had been profitable and enjoyed growing revenue amid the popularity of digital denominations. The company’s 2021 debut on Nasdaq was a huge success, with shares ballooning more than 30% on the first day of trading. Its Super Bowl ad in February 2022 was clearly the most popular (the 60-second spot centered on a sweepstakes for three $1 million prizes, paid in Bitcoin).

The company’s fortunes soured last year with the decline of crypto. Bitcoin, from its November 2021 peak, lost some 80% of its value over the following 12 months. Lately, it has recovered to a degree but remains 56% below its apex.

Coinbase stock is down to one-seventh of its late-2021 value and has not perked up. Revenue has plunged. The company reported a net loss of more than $1 billion in last year’s second quarter. Red ink has dogged it ever since, and Wall Street estimates show it losing money when it reports earnings on Thursday. In fact, projections are that it will remain unprofitable through at least next year.

Meanwhile, Coinbase has come under federal investigation. The Securities and Exchange Commission has served it with a Wells Notice, informing the company that its business practices were under scrutiny. At the moment, exactly what the SEC is looking for is not clear. Coinbase responded that the enforcement action would “fail on its merits.”