Crypto Winter May Be Harsh for Coinbase

The weather outside is warming up, but Coinbase Global COIN -22.67%

are settling for a harsh winter.

Even before the price of bitcoin and other cryptocurrencies fell this month, Coinbase COIN -22.67%

recorded a large drop in activity on its platform in the first quarter, the company reported on Tuesday.

The number of monthly trading users fell by more than 2 million from Q4 to Q1, to 9.2 million. Trading volume fell 44% during that period and total trading revenue fell 56%. The company said crypto volatility continued to decline in April, hitting its lowest level since mid-2020, and expects monthly user and trading volumes to be lower in the second quarter.

The company has long predicted another possible deep freeze for crypto activity. CEO Brian Armstrong said during the company’s earnings call on Tuesday that Coinbase has experienced past cycles in crypto and he now sees an opportunity to focus on building for the future. instead of trying to keep up with frantic activities. “Ironically, I have never been more optimistic about our position as a company,” he said.

However, investors in the company can use whatever makes him optimistic as Coinbase stock has lost about three-quarters of its value so far this year. Since it is difficult to predict the crypto cycle, when it might change, and how big the next wave will be, investors need to consider other measures of the underlying economics of the company. company. It’s also worth noting that the percentage of retail fees — or how much retail transaction revenue is generated as a percentage of retail transaction volume — actually increased in the first quarter compared to the fourth quarter. . There has long been concern that this ratio, currently at 1.31%, will plummet over time. The fact that it may not be an indicator that Coinbase’s relatively old brand of value to customers and its pricing strategies is working.

However, that resilience was offset during the quarter due to a drop in the rate institutions pay. Institutional trading makes up the majority of Coinbase’s volume, although it generates a portion of the revenue that retail does. The institutional fee rate fell throughout the first quarter, which the company attributed to a change in the fee structure for market makers. Institutional transactions also account for an even larger share than in recent quarters.

There is long-term potential for business expansion in non-cryptocurrency trading activities. For traditional asset brokers, one way to offset the drop in active trading is to offer higher yielding, passive investment products or cash returns to continue earning. suck up assets while earning more on lending. Robinhood Markets this week said it would increase the interest rate available on uninvested cash to 1%.

The number of Coinbase users interacting with the profit-generating products increased from 3.6 million to 5.8 million in the most recent quarter, which the company said was largely driven by the launch of “booking.” bet” in the Cardano blockchain network. Staking is a way to earn some form of profit by receiving rewards for participating in a network. In the first quarter on average, more than half of monthly trading users were using non-trading products, such as staking, the company said. Revenue from subscriptions and Nontransaction services fell 29% Q4 QoQ compared with the first quarter, though it’s still nearly triple what it was a year ago.

However, the future potential of crypto profits has its own uncertainties. First, there are regulators: Coinbase didn’t launch its much-anticipated interest-paying lending product last year after the Securities and Exchange Commission threatened enforcement action. It is not yet clear how or in what form those services might return. People can also seek to profit in the broader “decentralized finance” ecosystem, but some may be reluctant to do so following the volatility surrounding TerraUSD. Among the drivers of recent growth in algorithmic stablecoins is its use in a lending protocol that allows investors to earn returns of almost 20% annually.

Coinbase can be very smart when it comes to seeding to grow before winter arrives. But investors shouldn’t start dreaming about spring flowers just yet.

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