How Has Coinbase Fared In Previous Crypto Bear Markets?

Coinbase was a big beneficiary of the crypto boom, with revenues in Q1 rising over 9x year-over-year to about $1.8 billion, as users flocked to its platform to cash in on soaring cryptocurrency prices. However, cryptocurrencies now appear to be in a bear market. Prices for bellwether cryptocurrency Bitcoin have declined from levels of around $62,000 in mid-April, as Coinbase went public, to just about $35,000 as of Sunday. Although prices have stabilized a bit since they fell to as low as $32,000 last week, the recent sell-off is a reminder that the crypto market is subject to big boom and bust cycles. So how is this likely to impact Coinbase’s performance going forward?

Coinbase’s revenues are very sensitive to cryptocurrency pricing, as prices influence the number of monthly transacting users on its platform and the total value of transactions. As prices collapse, users will be less active, while transaction revenue will also decline. For perspective, over the last crypto bear market in 2018 through which Bitcoin prices plunged by over 80%, Coinbase’s MTUs fell by about 70% from 2.7 million in Q1 2018 to just 0.8 million in Q1 2019. [1] Coinbase’s Trading Volumes also fell from $56 billion in Q1’18 to just $7 billion in Q1’19 – a whopping 87% decline. If the bear market in Bitcoin continues, we could see Coinbase’s revenues and margins contract substantially in the coming quarters. That said, we believe some of the cyclicality is already priced into Coinbase’s stock, which remains down by over 30% since it listed on April 14.

Our interactive analysis Coinbase Revenues: How Does COIN Make Money? provides an overview of Coinbase’s business model and key revenue streams.

[5/18/2021] Coinbase Updates

Coinbase stock declined by about 4% in Monday’s trading and fell further by about 3% in the post-market session to about $240 per share, falling below the $250 IPO reference price. The stock is now down by over 25% over the last month. So what’s driving the current sell-off?

On Monday evening, Coinbase said that it plans to raise about $1.3 billion via a convertible bond sale, a move that could be dilutive to existing shareholders. Investors were also likely surprised by the timing of the issue, considering that Coinbase just went public in mid-April via a direct listing (which doesn’t involve issuing new shares or raising capital), signaling that it didn’t require cash. So the company’s decision to issue bonds a little over a month later is likely raising some questions.

More importantly, Bitcoin, the bellwether cryptocurrency, appears to be headed into a bear market. Bitcoin prices are down by over 20% over the last month and remain about 30% off their all-time highs. Coinbase’s revenues are sensitive to cryptocurrency pricing, as prices influence the number of monthly transacting users on its platform and the total value of transactions. If prices continue to trend lower, this could impact Coinbase’s revenue and profitability for this year. For perspective, over the last crypto bear market in 2018, Coinbase’s MTUs fell from 2.7 million in Q1 2018 to 0.8 million in Q1 2019. [2]

Our interactive analysis Coinbase Revenues: How Does COIN Make Money? provides an overview of Coinbase’s business model and key revenue streams.

[5/5/2021] What’s Happening With Coinbase Stock?

Coinbase stock (NASDAQ: COIN) has trended lower since it went public on April 14, falling from levels of about $328 per share on listing day to about $281 per share as of yesterday. So what’s driving the sell-off?

Firstly, Coinbase went public via a direct listing, which enables insiders to sell shares right away without the usual post IPO lockup period that limits the initial supply of shares. This could be putting some pressure on Coinbase’s stock price. We saw a similar trend last year, as well, with the stocks of workplace management software maker Asana and big data player Palantir Technologies, which went public through direct listings. Both companies saw their stocks move sideways or decline for a few months post their IPOs.

Secondly, the price of Bitcoin, the bellwether cryptocurrency, has declined by almost 15% since Coinbase went public. Coinbase’s revenues are quite sensitive to cryptocurrency pricing, as prices influence the number of monthly transacting users on the platform and the total value of transactions. If prices continue to trend lower, this could impact Coinbase’s revenue and profitability for this year.

Thirdly, there are concerns that Coinbase’s transaction fees – which account for over 80% of its revenues – will face pressure as competition rises. Coinbase charges retail users a spread of about 0.50% for transactions, besides another fee of between 1.5% and 4% depending on how they fund their trades. In comparison, Robinhood offers commission-free investing in cryptocurrency on its app, while PayPal

PYPL
and Square also offer lower fees compared to Coinbase in some scenarios. Moreover, the crypto markets are still in their early stages of development, and it’s likely that many more players will enter the fray and potentially drive down transaction fees and profit margins for Coinbase.

Our interactive analysis Coinbase Revenues: How Does COIN Make Money? provides an overview of Coinbase’s business model and key revenue streams.

[4/23/2021] Can Coinbase Handle A Crypto Bear Market

Coinbase stock has had a rocky ride since it went public last week. While the stock opened at roughly $328 per share on listing day, it has trended lower since, to about $293 per share as of yesterday. Although the decline is partly driven by the fact that the company went with a direct listing, enabling insiders to sell shares right away without the usual post IPO lockup period, the cryptocurrencies that Coinbase’s platform enables customers to buy and sell have also corrected. For example, the price of Bitcoin – the largest crypto asset by market cap – has declined by almost 20% since Coinbase went public. So can Coinbase’s stock hold up through a potential crypto bear market?

About 90% of Coinbase’s revenues come from transaction revenues, which are very sensitive to the pricing trend for cryptocurrencies (particularly for bellwether Bitcoin). This, in turn, influences the number of monthly transacting users on the platform and the total value of transactions. As Bitcoin prices roughly doubled over Q1, the company saw a quarterly trading volume surge to about $335 billion – that’s higher than the trading volumes for the full years 2019 and 2020 combined. Now, if prices decline, MTUs and transaction volumes on the platform will likely decline sharply, hurting Coinbase.

Bitcoin prices are being impacted by a couple of factors. Firstly, with Covid-19 vaccinations picking up in the U.S. and the economy opening up further, investors could be moving funds away from somewhat speculative cryptos to real economy assets. Moreover, there have been reports that the Biden Administration is looking to double the capital gains tax on the wealthiest Americans to 39.6% from the current 20%, and this has also likely hurt cryptocurrencies, which have rallied big over the last year. That said, we think that the inherent cyclicality in crypto prices and transaction revenues is priced into Coinbase stock at current levels. The stock trades at just about 11x forward revenues, despite the fact that revenue growth stood at 139% last year and is poised to accelerate further this year.

Our interactive analysis Coinbase Revenues: How Does COIN Make Money? provides an overview of Coinbase’s business model and key revenue streams.

[4/13/2021] How Does Coinbase Make Money?

Coinbase, the largest U.S. cryptocurrency exchange, is expected to go public on April 14, via a direct listing on the Nasdaq

NDAQ
exchange with the ticker COIN. Although the proposed listing price isn’t known yet, investors expect that valuations could top $100 billion, given the strong interest in cryptocurrencies and the company’s stellar earnings for Q1 2021. In our interactive dashboard Coinbase Revenues: How Does COIN Make Money? we provide an overview of Coinbase’s business model and key revenue streams. Parts of the analysis are summarized below.

Coinbase’s Business Model

Coinbase’s platform enables retail and institutional customers to buy, sell, and store cryptocurrencies such as Bitcoin and Ethereum. The company primarily reaches customers via its Coinbase, Coinbase Pro, and Coinbase Wallet apps and its websites. Coinbase had a total of about 56 million retail users as of Q1 2021. Roughly 90% of the company’s revenues (as of 2020) came from the transaction fees from trading and via services such as storage and analytics. Coinbase charges its customers transaction fees (estimated at about 0.5%) based on the volumes that they trade, with larger trades seeing lower fees. The company’s commissions are higher than traditional exchanges, given the higher transaction costs for Bitcoin and other cryptos. About 10% of the company’s revenues come from sales of its own crypto assets to customers.

How Have Revenues Trended?

The company’s transaction revenues are heavily dependent on the pricing trend for cryptocurrencies (particularly for bellwether Bitcoin). This, in turn, influences the number of monthly transacting users on the platform and the total value of transactions. Higher price volatility for crypto assets also typically helps revenues. Total revenue rose from around $534 million in 2019 to $1.28 billion in 2020, as the company’s monthly transacting users rose from about 1 million to about 2.8 million over the period, with total trading volumes rising from around $80 billion to $193 billion. The company had a stellar Q1 2021, with estimated Revenues growing to $1.8 billion, with trading volume for the quarter rising to $335 billion as the price of Bitcoin almost doubled year-to-date, causing the number of active monthly traders to surge from 2.8 million at the end of last year to 6.1 million in Q1. That said, it’s probably unrealistic to expect the company to maintain its Q1 growth rates for the rest of 2021, given the cyclical nature of the crypto market. Moreover, rising bond yields and a stellar 8x run in Bitcoin prices make the crypto market quite vulnerable to a correction in the near term.

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