Coinbase Trading Revenue Under Pressure as Crypto Comes of Age

(Bloomberg) — It’s been a landmark year for digital assets, but the move into the mainstream is making price swings less wild, diminishing a key appeal for many investors and poised to shake up the growth of the biggest source of revenue for exchanges like Coinbase. Global Inc.

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Despite reporting higher-than-forecast first-quarter revenue and profit, consumer trading volume at the largest U.S. crypto exchange was $56 billion, down from a peak of $177 billion in the fourth quarter of 2021 at the height of crypto’s previous bull run. Trading volume for Bitcoin, which fuels Coinbase’s transaction fee revenue, has been muted since the world’s largest cryptocurrency hit an all-time high in March following the launch of spot Bitcoin exchange-traded funds.

“Volatility looks much more mature this cycle than it did in 2021,” Alesia Haas, chief financial officer at Coinbase, said during JPMorgan’s Annual Global Technology, Media and Communications Conference last week. “Bitcoin’s volatility, Ethereum’s volatility, as I call it, is starting to come into the network.”

According to researcher CCData, the average volatility of digital assets has fallen to 57% this year from around 79% in 2021. Higher volatility tends to attract more speculative investors.

At its May investor conference, Coinbase executives mentioned words like “maturity” and “maturing” seven times when talking specifically about the crypto market.

What’s driving all the talk about market maturation is that this year’s transaction fee revenue for Coinbase and other exchanges is unlikely to match 2021’s bull run.

Other exchanges are also forecasting lower volatility this year, partly as a result of the spot Bitcoin ETF leading to more orderly inflows and less chaos. Additionally, token prices, including Bitcoin, are already high, which means they may not rise as quickly.

“The market is more mature today and less likely to experience sharp fluctuations,” said Bitstamp USA CEO Bobby Zagotta. “It will still be volatile and there will still be upward momentum in Bitcoin and crypto prices, but I don’t think it will be as explosive a roller coaster as previous cycles.”

Thomas Perfumo, Kraken’s head of strategy, echoed that sentiment. “I don’t think we’re going to experience many of the repeats that 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 is not bleak at all. For example, net income is expected to increase nearly 20 times this year compared to 2023, according to data compiled by Bloomberg. However, absolute revenue and net income figures are still expected to follow the peak in 2021.

The company’s outlook will depend on how long the current bull market continues. Needham & Co. analyst John Todaro expects Coinbase to generate more revenue if it extends into 2025. Coinbase’s ability to maintain its spot market share will also be important, as its share dropped from 6.5% at the beginning of 2023 to 4.18% in May, according to CCData.

Still, Coinbase is now much more diversified and less reliant on transaction fees than in 2021. The company made nearly a third of its sales in the first quarter from other sources, such as USDC stablecoin revenue sharing. It also generates revenue from its Base blockchain, which was launched last year. Todaro said this could be a “$300 million annual revenue opportunity.”

And Coinbase is currently the custodian of most spot Bitcoin ETFs in the US. It is also listed as the custodian of five spot Ether ETFs that are close to being cleared by US regulators. Ether ETFs are unlikely to be a meaningful source of income in the short term. However, Oppenheimer & Co. analyst Owen Lau expects Coinbase’s reputation in the industry to improve.

Some, like Lau, even argue that lower volatility makes Coinbase shares more attractive. The stock is up nearly 40% so far this year but remains more than 30% below its all-time high reached in late 2021.

Lau said the maturity of the market will benefit Coinbase in the long run as it diversifies away from just trading. “Coinbase revenue could become even more predictable. This means they can have a higher earnings multiplier.”

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