The crypto sell-off of the last several days was preceded by staffing cuts at several companies in the business of facilitating the trading of decentralized assets and tokens. Reductions at Gemini and Crypto.com were superseded today by news that Coinbase is cutting more than 1,000 staff. Given that Coinbase and other crypto exchanges were high-flying success stories of 2021, the retreat may feel surprising.

How could companies like Coinbase, which reported massive growth and huge profits last year, now be in a position where they would need to slash staffing? This isn’t to overly focus our attention on exchanges; other companies in the larger web3 space are also under fire, including BlockFi, which also recently cut staff.

The answer to the sharp swap from rapid staffing to personnel cuts at exchanges, however, is something that we can actually understand with reasonable clarity. It boils down to this: Costs scaled at crypto exchanges as their revenues grew. Now, as their top lines contract due to falling trading volumes, those previously warranted costs have morphed into a burden.

Leaning on May data from consumer trading service Robinhood, Coinbase performance data and public layoff notices from crypto exchanges, let’s explore how things got so upside-down so quickly.

Booming revenues, costs

Coinbase had a simply excellent 2021. Its net revenues grew from $1.14 billion in 2020 to $7.36 billion last year, with its net income rising from $322 million to $3.62 billion over the same time frame. Growth and profitability like that impressed investors and potential employees alike, with both groups flocking to the company.

In its final earnings report of 2021, Coinbase indicated it had invested heavily to keep the revenue expansion coming, citing both hiring and its cash position as potential growth levers: