The recent carnage in the cryptocurrency markets is causing big problems for Coinbase Global(COIN8.32%). When the price of Bitcoin and other digital assets were relentlessly rising during the pandemic, users were happy to pay Coinbase hefty fees to buy and sell on the platform. The company’s incredible growth over the past two years was driven by speculation that prices would go ever higher, and for a long time they did just that.

The high-profile blowups of the Terra blockchain and Celsius Network’s blockchain-integrated trading platform, along with the tumbling price of Bitcoin, have greatly cooled this speculative fervor. Business had already slowed for Coinbase in the first quarter, but the environment has now deteriorated to the point where the company is looking to drastically cut costs. In a note to employees on Tuesday, Coinbase CEO Brian Armstrong announced that 18% of the workforce would be laid off.

Image source: Coinbase.

From growth to cost-cutting

Because Coinbase makes most of its money on transaction fees, revenue and profits tend to tumble when enthusiasm for cryptocurrency declines. Coinbase’s revenue crashed 27% in the first quarter to $1.17 billion, and net income declined by more than $1 billion year over year to a loss of $430 million.

Coinbase reported impressive profits during 2021, but those profits have now vanished. And remember, Coinbase’s first quarter ended before much of the recent turmoil in the cryptocurrency markets. It’s going to get a lot worse for Coinbase in the remaining quarters of 2022.

Cutting loose nearly one-fifth of its workforce will help rein in costs, but big losses will likely be the norm for the rest of the year. The company spent $1.2 billion on operating expenses in the first quarter alone. There’s really no bottom for revenue as interest in cryptocurrency dries up, so Coinbase may need to take more drastic measures if conditions deteriorate further from here.

The company had nearly 5,000 employees at the end of the first quarter, up from 1,700 a year prior. Even after the layoffs are complete, Coinbase will still have a higher headcount than it did at the end of 2021. That’s probably still far too many employees in this environment.

The stock has a long way to fall

Shares of Coinbase have already taken a beating over the past six months, dropping around 85% from its peak late last year. But don’t let that big number fool you — it could be a long way down from here. Coinbase still has a market cap of $11.5 billion.

That looks downright cheap if you consider the company’s results from 2021, but those results were an anomaly. Coinbase is no longer a fast-growing, ultra-profitable company. Revenue is crashing, and those fat profits have given way to concerning losses. Coinbase has a few billion dollars of net cash on its balance sheet, so it can absorb losses for a while. But if the cryptocurrency crash deepens as the year goes on, it won’t take long for much of that cash to consumed.

How much further could Coinbase stock fall? The short answer is a lot. The cryptocurrency downturn doesn’t look like it’s going to reverse anytime soon. If Coinbase ekes out a few billion dollars of revenue this year and delivers a massive loss, it’s hard to see investors willing to value the company very highly.

Coinbase’s growth story is dead for now. That doesn’t bode well for the stock.

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