Cryptocurrency exchange Coinbase will not escape the profitability problems it will face due to the downturn in the cryptocurrency market, despite having a strong brand and credibility in the cryptocurrency market, investment analysts say.
On January 19, ratings firm Moody’s published a note on Coinbase discussing the downgrade of Coinbase’s senior debt and corporate (CFR) ratings, a rating assigned to reflect an opinion on a company’s ability to meet its financial obligations.
Coinbase’s CFR and senior debt were raised to B2 and B1 from Ba3 and Ba2, respectively, indicating the company is “non-investment” and “speculative and high credit risk,” according to Moody’s.
The firm noted that Coinbase is suffering from “significantly weakened revenue and cash flow” due to “challenging conditions,” specifically the declining cryptocurrency prices and reduced trading activity.
Market conditions led to Coinbase laying off 20% of its employees, about 950 people, on Jan. 10, the second wave of recent major layoffs following an 18% headcount cut in June 2022 in an attempt to cut costs.
Coinbase CEO Brian Armstrong at a conference in 2018. In the latest round of layoffs, he said the firm needed “adequate operational efficiency to weather downturns in the cryptocurrency market.” Image: Flickr
However, despite Coinbase’s commitment to maintaining liquidity, Moody’s still expects “the company’s profitability will remain in question.”
According to Moody’s, the bankruptcy of fellow crypto exchange FTX is causing heightened concern and uncertainty regarding cryptocurrency regulation.
It states that sudden regulatory action in the crypto industry could negatively impact Coinbase’s revenue due to increased compliance costs.
However, Moody’s added that increased oversight “may end up favoring relatively more mature and compatible cryptoasset platforms like Coinbase.”
Meanwhile, a separate note from JPMorgan analysts claims that Coinbase’s trust and reputation in the industry has been strengthened following the recent crashes.
“While the crypto ecosystem has faced major trust issues, Coinbase has solidified its credibility and brand — at least relatively.”
Analysts at the financial firm, who maintained Coinbase’s rating at “neutral” in their latest report, said that Coinbase could even be “a beneficiary of the problems” other exchanges have experienced since FTX’s introduction.
According to JPMorgan analysts, the upcoming Shanghai hard fork of the Ethereum blockchain could also be a positive moment for the exchange.
Related: Coinbase Stops Operations in Japan Due to Trading Downturn
The update “could usher in a new era of staking for Coinbase.” Analysts estimate that 95% of retail investors on the platform can bet on Ethereum after the upgrade, which will bring Coinbase nearly $600 million a year.
Coinbase’s share price hit an all-time low of $31.95 on January 6, after more than a year of continuous price declines, according to Yahoo Finance data. The day before, veteran investor and ARK Invest CEO Kathy Wood bought $5.7 million worth of Coinbase shares.
Since then, the share price of Coinbase and other cryptocurrency-related companies has skyrocketed.
Coinbase is up 72.6% from the Jan 6 low and was trading at over $55 at the Jan 20 close, where it was up 11.6% on the day.