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Coinbase Trading Revenue Under Pressure as Cryptocurrencies Come of Age
(Bloomberg) — It’s been a milestone year for digital assets, but the shift to the mainstream is making price swings less violent, diminishing a key attraction for many investors and poised to shake up the growth of the main source of revenue for investors. exchanges like Coinbase Global Inc.
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While first-quarter revenues and profits came in above forecasts, consumer trading volume at the largest U.S. cryptocurrency exchange was $56 billion, compared to a peak of $177 billion in the fourth quarter of 2021 at culmination of the previous cryptocurrency bull run. Bitcoin trading volume, which fuels Coinbase’s trading fee revenue, has remained subdued since the world’s largest cryptocurrency hit all-time highs in March following the introduction of spot Bitcoin exchange-traded funds.
“Volatility looks much more ripe in this cycle than it did in 2021,” Alesia Haas, chief financial officer at Coinbase, said at JPMorgan’s annual global technology, media and communications conference last week. “Bitcoin volatility, Ethereum volatility is starting to show up, what I call, on the grid.”
According to researcher CCData, average volatility for digital assets has fallen to 57% this year, compared to around 79% in 2021. Higher volatility tends to attract more speculative traders.
At the May investor conference, Coinbase executives mentioned words like “maturity” and “maturation” seven times, especially when talking about the cryptocurrency market.
What prompts talk of market maturation is the fact that, for Coinbase and other exchanges, revenue from trading fees this year is unlikely to match 2021’s bull run.
Other exchanges also expect less volatility this year, partly as a result of the creation of the Bitcoin spot ETF which has led to more orderly inflows and less chaos. Furthermore, prices of tokens, including Bitcoin, are already high, meaning they simply may not be able to rise as quickly.
“Today the market is more mature and is less likely to experience violent swings,” said Bobby Zagotta, CEO of Bitstamp USA. “It will still be volatile, and there will still be upward momentum in Bitcoin and cryptocurrency prices, but I don’t think it will be as explosive up and down as previous cycles.”
Thomas Perfumo, head of strategy at Kraken, echoed this sentiment. “I don’t think we’re going to have a lot of repetition of what we’ve seen in previous markets in terms of the magnitude of growth,” he said in an interview.
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The future of Coinbase, however, is far from bleak. Net profit, for example, is expected to rise about 20 times this year compared to 2023, data compiled by Bloomberg shows. But its absolute revenues and net income are still expected to be below its 2021 peak.
The company’s prospects will depend on the duration of the current bull market. If it extends to 2025, John Todaro, an analyst at Needham & Co., expects Coinbase to generate more revenue. Coinbase’s ability to maintain spot market share will also be key as its share fell to 4.18% in May, from 6.5% at the start of 2023, according to CCData.
However, Coinbase is now much more diversified and less dependent on trading fees than in 2021. The company already made about a third of its sales in the first quarter from other sources, such as revenue share on the stablecoin USDC. It is also earning revenue from its Base blockchain, which debuted last year. This could be “a $300 million annual revenue opportunity,” Todaro said.
And Coinbase is already the custodian of most spot Bitcoin ETFs in the US. It is also listed as the custodian of five spot Ether ETFs that are in the process of being cleared by US regulators. Ether ETFs are not expected to be a significant revenue driver in the near term. But Owen Lau, an analyst at Oppenheimer & Co., predicts they will boost Coinbase’s stature in the industry.
Some, like Lau, even argue that lower volatility makes Coinbase stock more attractive. The stock is up about 40% this year, although it is more than 30% below the all-time high it reached at the end of 2021.
Market maturity will benefit Coinbase in the long term, “because Coinbase is diversifying away from just trading,” Lau said. “Coinbase revenue could become even more predictable. This means they could earn a higher earnings multiple.”
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