Editor’s note: Coinbase is being forced to ease access to other cryptocurrencies amid a slowdown in mainstream bitcoin.
Coinbase fell below its $250 offering price for the first time on May 17 EST. The decline continued into May 19, with shares trading at $230.80 in pre-market.
Just a short time ago, Coinbase officially announced its first quarter 2021 earnings. However, Wall Street generally expected that the earnings report would not bring too many surprises to investors, as the company had already announced its initial results earlier.
According to the report, Coinbase reported revenue of about $1.6 billion in the first quarter of 2021, compared with market expectations of $1.814 billion and $179 million in the same period a year earlier.
The market reacted as Wall Street expected, with Coinbase shares closing down 6.53% at $265.10 on May 13, down close to the issue price of $250 at one point.
And Coinbase CEO Brian Armstrong made a big announcement after the earnings report, planning to go live with Dogecoin (Dogcoin) in the next six to eight weeks.
Since Coinbase’s IPO, the stock price seems to have entered a downward spiral, drifting away from pre-IPO investor expectations, and analysts at major investment banks are looking for more answers on how Coinbase can achieve sustained high growth. What are the factors that are currently limiting Coinbase’s growth? And can dogcoin become a new growth point for Coinbase?
Analysis: Coinbase’s pricing power weakens as exchange competition intensifies
Some analysts believe that Coinbase’s recent downturn is partly due to traditional banks’ major foray into the cryptocurrency market, as well as increased competition with other exchanges in the same industry.
According to an internal memo obtained exclusively by CNBC, Goldman Sachs informed its marketing staff that a newly created cryptocurrency trading unit has successfully traded two bitcoin-related derivatives. Morgan Stanley, meanwhile, has signaled its intention to offer cryptocurrency services to high-net-worth clients, and a number of other banks appear poised to follow suit.
David Trainer, CEO of investment research firm New construct, said Coinbase shares could fall 65 percent from current levels as new entrants join the cryptocurrency market.
Trainer wrote in a research note: “Coinbase’s valuation upside may have peaked and the company’s market share and pricing power may be further eroded due to increased competition in the cryptocurrency trading space.”
Moffett Nathanson analyst Lisa Ellis took a different view, maintaining her $600 price target. She said bearish Coinbase traders are looking for signs of alleged rate erosion.
“It’s very easy to take a negative view on Coinbase,” she said. However, it may be too early to think that competition will hurt the company’s profits anytime soon.” But she said sluggish user growth could deal a bigger blow to the company’s share price popularity, at least in the short term.
Coinbase’s monthly active user base has grown to 6.1 million, according to its previously released earnings preview. The platform’s transaction volume reached $335 billion and has 56 million verified users. The platform has $223 billion in assets, representing 11.3% of the crypto asset market share, with $122 billion in assets from institutional clients.
In Ellis’ view, the platform’s growth in monthly active users is coming more from professional investors, and Coinbase’s growth in monthly active users may be impacted by PayPal and other platforms that provide a venue for crypto trading services to the average investor.
Bitcoin Transaction Fees Make Up the Bulk of the Market, but the Bitcoin Bull Market May Be Coming to an End
The potential competition between exchanges is one aspect of the weakening Coinbase market, while the other is related to Bitcoin.
On April 6 of this year, Coinbase announced its expected results for the first quarter of 2021. In terms of revenue mix, about 85.8% of Coinbase’s revenue came from customer transaction fees and about 3.5% from subscription and service revenue, mainly from asset custody fees paid by customers. In addition, approximately 10.6% of revenue was generated from other revenues.
Of the transaction fees, bitcoin and ethereum again account for the bulk of the transaction fees. The data shows that Coinbase bitcoin fees account for 41% and trading ethereum fees account for 15%.
Industry insiders point out that Coinbase’s performance in 2020 to 2021 rose sharply in direct relation to this bull market in bitcoin.
But recently bitcoin is experiencing a steady stream of flash crashes, and the bitcoin bull market so far this year is on the verge of collapse. Since May 13, bitcoin prices have seen a flash crash through $50,000. on May 19, bitcoin once fell through $40,000. The total global cryptocurrency market cap evaporated by about $279.65 billion in 24 hours.
According to bitcoin home news, 223,004 people and 12 billion dollars have exploded in the past 24 hours on the 19th.
Once the bitcoin bull market ends, Coinbase’s main revenue may shrink significantly.
Dogcoin Up 14,000%, Coinbase Plans to Enter the Game
Coinbase is also aware of the potential competition from the increasing number of exchange platforms entering the market, as well as its own shortcomings.
This was mentioned in the shareholder letter at the beginning of Coinbase’s Q1 earnings report.
(Coinbase’s shareholder letter, source: sec.gov)
The letter states, “While we achieved strong first quarter results, the rapid growth of the crypto economy also presents challenges for Coinbase. Competition is intensifying as new market entrants continue to enter the cryptocurrency market. Our competitors are supporting certain rapidly growing crypto assets with high transaction volumes that we do not currently support, and offering new products and services that we do not. We welcome these challenges as they demonstrate the rapid growth of the markets we serve, but we must also continue to act quickly to address these challenges, which motivates us to move toward action and growth.”
Dogcoin is one of the “currently unsupported crypto assets” mentioned by Coinbase, and for that reason, Brian Armstrong’s announcement that he plans to go live with Dogcoin is not an idle one.
So why Dogcoin?
It’s worth noting that dogcoin has risen by up to 14,000% this year, far outperforming other cryptocurrencies such as bitcoin, making it one of the most appreciated digital assets this year. Data from cryptocurrency researcher CoinMarketCap shows that the total market value of dogcoin reached $87 billion on May 6, surpassing FedEx and becoming the 4th largest digital currency after bitcoin, ethereum and coinancoin.
Even Tesla CEO Elon Musk, who recently called a halt to bitcoin car purchases, tweeted shortly afterwards on the social media platform that he was working with dogcoin developers to improve transaction efficiency. It also said that dogcoin could speed up block times by 10 times and reduce the cost of fees by 100 times.
William, chief researcher at the OEE OKEx Institute, has told the media. “Given the declining market capitalization share of bitcoin, the industry speculates whether ethereum is expected to take over bitcoin to carry the market banner. But Bitcoin can be regarded as the ‘Maotai’ of the crypto-digital currency market, and its dominant position is hard to be shaken. The cryptocurrency market is currently in a bull market phase, so various cottage coins are generally rising, which in turn pulls down Bitcoin’s market share, and Bitcoin’s market share will increase again when the market enters a bear market phase in the future. “
Coinbase’s currently tradable products are mainly mainstream cryptocurrencies such as bitcoin and ethereum. Subject to compliance considerations and the stringency of U.S. regulation, the variety of transactions and financial services supported on Coinbase are far lower than those of its competitors. With mainstream Bitcoin slowing down, Coinbase is being forced to ease access to other cryptocurrencies or else struggle to deliver the desired results for the next fiscal quarter.
It is worth mentioning that on the 19th, while bitcoin lost $40,000 and ethereum lost $3,000, dogcoin also lost $0.4, extending its intra-day decline to 20% at one point. This may have a variable effect on Coinbase’s decision to go live with dogcoin.
The content of this article does not constitute any investment advice.
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