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Crypto Company Coinbase Contracts​

By Jake Rickman​

What do you need to know this week?

The US-based crypto exchange platform Coinbase has laid off 1,100 employees — equivalent to nearly 20% of its staff.

A blog post on the company’s website cites a series of specific factors that contributed to the decision. These include:

  • deteriorating economic conditions implying a recession and which could lead to a “crypto winter”;
  • the need to manage the company’s costs; and
  • over-hiring.
Why is this important for your interviews?

If you believe we are already in the throes of a recession as Coinbase’s senior management apparently does, this unfortunate bit of news lends your argument additional credence. But even if you are sceptical as to if (or when) a recession is due, this is a noteworthy story, particularly if you are interested in crypto and blockchain developments.

The crypto market has been in free fall throughout 2022. Bitcoin, often used as an index for the wider market, is trading at an 18-month low at around $22,000. As the BBC notes, the cryptocurrency’s value dropped 25% in the last five days alone. The same trend holds true throughout nearly all of the market.

In the context of an interview, you will score more points if you can explain the root cause of Coinbase’s woes. This means going further than simply connecting Coinbase’s substantial exposure to crypto. To do this, it is first necessary to identify how exactly Coinbase generates cash, and then analyse how the collapsing market directly threatens the company.

To understand Coinbase’s business model, you may find the interim reports it is obligated to file quite helpful — in particular its most recent SEC Form 10-K, which contains its FY21 annual report.

In the first section of Coinbase’s 10-K, you can see that the report lists three business “products” (i.e., revenue generators): (i) retail, (ii) institutions, and (iii) ecosystem partners. However, on p 94, the executive narrative notes that “substantially all of [Coinbase’s] revenue” is generated from commission fees charged on each retail transaction. In other words, Coinbase is substantially dependent on a single revenue stream.

If we consider that the downward volatility of the crypto market is likely to spook many retail investors, it follows that there will be fewer active crypto traders. For Coinbase, this directly results in less revenue, because its primary revenue driver is the commission it makes on each trade.

Taking this analysis a step further, a widespread recession would more severely impede crypto-trading activity given that much of the market’s activity has to date been driven by retail traders. Recessions tend to eat away at disposable income, which means retail traders have less money to risk on the crypto market.

As you may conclude, the business case for Coinbase’s future performance is not looking strong.

How is this topic relevant to law firms?

Employment laws in the US are more employer-friendly than in the UK, which means there are fewer legal impediments to Coinbase laying off 20% of its workforce compared to, say, P&O Ferries’ recently announced redundancies. Nonetheless, Coinbase will likely have consulted with employment lawyers before the announcement.