Coinbase never capitalized on the good times in crypto

For cryptocurrency, 2021 was a very exciting year. For Coinbase, the best known cryptocurrency company that's publicly traded, it was so-so. Strangely, Coinbase seemed unable to capitalize on frothiness in the very financial market it was built to serve.

Why it matters: There's an old investor adage: in a gold rush, the guy selling shovels gets rich even if there's no gold. Coinbase should be a shovel company, but somehow it hasn't been.

• Driving the news: On Thursday afternoon, Coinbase (COIN) was trading at $58.50, that's down 83% from its first day of trading in April 2021.
• Of note: COIN price did rally with the rest of the crypto market as Bitcoin hit its most recent all time high. COIN hit $343 on Nov. 7, just ahead of Bitcoin hitting $69,044.77 on Nov. 10.

What they're saying: "It has underperformed relative to cryptocurrency markets," Michael Miller, a Coinbase analyst with Morningstar told Axios. "I think a lot of it comes down to expenses."

• The company has increased expenses dramatically to scale, Miller argued. "They are up about 70% over the last 6 months."
• Revenue is not down much, he noted.
• Coinbase has faced a lot of scaling issues. Longtime crypto denizens know it has a bad reputation for customer service, though it is trying to catch up, and Miller said that's what some of the current spending is going toward.

Yes, but: Coinbase would argue that this spending has been an intentional choice. In an investor call following the earnings release, Alesia Haas, the CFO, said: "We're choosing to make 2022 an investment year. And that's because we believe that investing now is key to our future of becoming a multi-product platform serving a diverse customer base."

By the numbers: Despite his critiques, Miller puts the fair value of Coinbase stock at $131 right now, well above the market's price.

• Coinbase reported revenue of $1.17 billion and a net loss of $430 million, for the first quarter of 2022.
• "You've seen the market really shift away from being willing to give low profit or high multiple companies the benefit of the doubt," Miller said.

Coinbase is also expensive to use. Miller said the cost to transact on Coinbase averages about 1.3% of trade value, Miller estimated. For comparison, FTX charges 0.10% between the two parties in any given trade.

• "The overarching long term risk to Coinbase is fee compression," Miller said, but he also says that's not the problem now. Users are coming to Coinbase, perhaps due to name recognition. It's just spending a lot of money.

Bottomline: The crypto market is looking bad right now, and that's going to dampen trading. Miller said, "They've positioned themselves for good times, but it seems right now that we're going into bad times."