Coinbase Faces Challenges Amid Declining Transaction Volumes and Rising Bitcoin ETF Competition
Summary:
Despite expecting to profit from bullish markets, Coinbase reports a 16% drop in monthly transacting users and a 54% reduction in trading volume throughout the first three quarters of 2023. Total transaction revenue is 51% lower compared to the same period last year. Bitcoin remains an exception, with a 28% increase in trading volume. The introduction of multiple Bitcoin ETFs in January has led to highly competitive assets, with some companies waiving fees, contrasting with Coinbase's 1.5% to 4% crypto-related fees. Coinbase serves as custodian for eight of the 11 new Bitcoin ETFs. The company is not planning to decrease transaction fees. Investors await Coinbase’s Q4 earnings on Feb. 15 for possible fee reductions and incentives to crypto ETF issuers. Coinbase faces challenges adapting to the changing crypto marketplace.
A considerable portion of Coinbase's revenue originates from transaction fees, thus prospering when markets are bullish. As transaction fees are based on a percentage, it should bring in more money per transaction and an increase in trades with more participants seeking to benefit from a market surge. Despite this expectation, the trends observed in the public financial reports of Coinbase have shown mixed results throughout the first three quarters of 2023. The company has experienced a 16% drop in monthly transacting users (MTUs), classified as consumers who transact at least once within the measured 28-day period across one or multiple products on the platform. Additionally, trading volume has fallen by 54%; consumer trading volume is down by 69%, and institutional volume has experienced a 50% drop. Total transaction revenue so far this year is down by 51% compared to the same period in the previous year. Furthermore, around half of all customer-held crypto assets and 37% of transaction revenue is tied to Bitcoin (BTC). The company reported a reduction in trading volume across virtually all cryptos, albeit with the exception of Bitcoin, where its share of trading volume saw a 28% rise.
The implementation of numerous Bitcoin ETFs in January marked a significant advancement for public investment consideration of crypto assets. Excluding Feb. 1, the daily volumes within the ETFs from Jan. 11 to Feb. 5 surpassed $1 billion. This highly competitive new asset category has seen fees reduced to as low as between 0.2-1.5%, with some companies even offering to waive fees for a certain duration or for a particular dollar volume. On the contrary, Coinbase charges between 1.5% and 4% for crypto-related services. Given that spot ETFs have a powerful correlation with their underlying assets, the decision to opt for the ETF instead of the underlying asset is a logical one made feasible by discount brokerages like Robinhood. This poses an issue for Coinbase since approximately 17% of its revenue stems from Bitcoin transaction fees.
Coinbase however benefits from these ETFs in the sense that it acts as the custodian for eight of the 11 new Bitcoin ETFs. As the ETF issuers are mandated to physically possess the underlying asset, the company is expected to earn about 0.1-0.15% in custodian fees, a significantly smaller amount than from transactions of the underlying asset. The one upside is that those who view crypto as an alternative to traditional fiat currencies will likely continue to directly possess their cryptocurrencies through the exchange. Yet, given the fact that the number of investors who hold Bitcoin as a investable asset that can be converted to fiat currencies when required will probably be small and continue to lessen, the most likely paradigm is that the dominance of the "crypto native" will increasingly decline.
Emilie Choi, the Chief Operating Officer of Coinbase stated during the company’s third-quarter earnings call that Coinbase does not plan on reducing transaction fees, appearing to not have anticipated the amount of ETFs being authorized for trading or their immense popularity. If more issuers obtain approval, we might anticipate a dual impact: (1) a decrease in the trading volumes of the underlying assets in favor of ETFs, and (2) a rise in competition from other exchanges following the approval of crypto ETFs. Interested investors in Coinbase should watch out for the company’s Q4 earnings on Feb. 15 to understand if there will be a reduction in fees charged for Bitcoin transactions and the incentives offered to crypto ETF issuers. Challenging tasks lie ahead in attracting exposure to crypto-based assets through discount brokerages who also allow investors to effectively manage their other equities, derivatives, and crypto-based assets. A considerable chunk of the transactions undertaken by Coinbase in Q4 will likely come from shrewd investors who are betting on possible spot ETF approvals. As such, any increase in transactions during this period could be misleading.
For the immediate time being, Coinbase will likely continue to struggle due to falling transaction fee volumes. In the long run, the company will need to invest substantially in marketing itself as a prime spot for crypto ETF issuers, should it wish to remain the premier platform for all crypto activities.
Published At
2/8/2024 10:07:11 PM
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