LianGuai Blockchain News on August 5th Coinbase, a leading US cryptocurrency exchange, released its Q2 2023 financial report yesterday. Its revenue of $708 million exceeded analysts’ expectations. Its stock price also rose 1.6% to $92.23 in after-hours trading, but then fell to $87.31 at the close. The data doesn’t lie, and such market performance is not surprising because the crypto industry still believes that Coinbase has hidden risks.
Risk 1: Coinbase’s competitors are eating away at its market share in the US
Coinbase’s competitors are eating away at its market share in the US, so analyst Dan Dolev of Mizuho Bank warned investors not to get too excited. He said that Coinbase has increased retail prices since Q1, with a retail adoption rate of 221 basis points in Q2 compared to 168 basis points in Q1. This indicates that the average fees on the Coinbase platform have risen from about 1.7% to about 2.2%, which may accelerate the loss of market share in the retail sector.
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In the last quarter, Coinbase’s share of total trading volume compared to commission-free trading app Robinhood decreased from 65% in Q1 to 61%. TD Cowen analysts also expressed the same concerns and pointed out that early signs indicate that Coinbase’s market share is being taken by Block, a fintech company operated by Robinhood and Twitter founder Jack Dorsey. According to TD Cowen’s data, Coinbase’s share of the US retail cryptocurrency market decreased by 6.4% in Q2, while Robinhood and Block increased by 3.3% and 3.1%, respectively (as shown below).
In addition, Coinbase’s institutional trading volume in Q2 also dropped by 37% compared to Q1. Institutional traders have been feeling uneasy about the cryptocurrency market since the collapse of FTX last year, and many have flocked to regulated venues such as CME. Mizuho analysts believe that poor market performance may make people think that other cryptocurrency exchanges (such as Coinbase) may also face difficulties. TD Cowen and Mizuho Bank have both rated Coinbase lower than the market and maintained their target prices at $36 and $27, respectively.
Risk 2: Coinbase’s platform trading volume is severely sluggish
Coinbase’s total trading volume in Q2 dropped sharply to $92 billion, with $14 billion coming from retail users and $78 billion from institutional users. In comparison, this figure was $145 billion in Q1, a 57% decrease compared to the $217 billion in Q2 of last year.
In addition, the trading revenue for Q2 this year was $327 million, a 13% decrease compared to the previous quarter. This number is mediocre considering the low trading volume. The trading revenue for Q1 was $375 million, and the trading revenue for Q2 last year was $655 million. In fact, most of Coinbase’s revenue is related to interest income, but with the decline in the market value of Circle’s USDC stablecoin, its interest income reversed in Q2, dropping by 16% to around $200 million. TD Cowen analysts said on Friday that the deterioration of USDC supply is expected to continue into the third quarter, which will further impact Coinbase’s interest income.
Within the three months ending in June, Coinbase’s blockchain rewards (including staking service income) increased by nearly 20% compared to the first quarter, reaching $88 million. So, what drove this growth? Coinbase stated, “The increase in staking balance, including a significant increase in institutional ETH balances after the Ethereum Shapella upgrade in April.” Coinbase benefited from the rise in Ethereum prices, with asset value increasing by 17% in the second quarter compared to the first quarter.
In fact, besides the decrease in trading volume and revenue, Coinbase also faces a serious loss problem. The financial report shows a loss of $0.42 per share in the second quarter, with a net loss of $97.4 million, compared to a net loss of $1.1 billion in the same period last year.
Risk #3: Coinbase’s Ethereum Layer 2 network Base may not have a significant impact in the short term
Coinbase’s Ethereum Layer 2 network Base provided a soft launch for developers in July and will fully launch its mainnet on August 9th next week. The management of the exchange pointed out in the earnings call on Thursday that Base’s long-term goal is to become its main revenue driver.
Last weekend, due to the launch of a series of meme coins, there was an increase in activities on the Base chain. According to data from the on-chain data analysis platform DeFiLlama, Base on-chain revenue exceeded $870,000 in the past 7 days. However, investment bank TD Cowen confirmed that Base may not have a significant impact in the short term, primarily because there are many competitors in the Ethereum Layer 2 scaling solution space, such as Arbitrum, Optimism, zkSync, StarkNet, etc., and these competitors seem to have much greater strength than Base. For example, the Arbitrum bridged lock-up volume has exceeded 2.72 million ETH, zkSync has exceeded 1.2 million ETH, and Optimism is approaching 580,000 ETH.
Furthermore, due to recent events such as the BALD token and LeetSwap, the lock-up volume on the Base chain has also dropped significantly, from $41.2 million in early August to $7.18 million, a decrease of approximately 82.5%. At the same time, net inflows of assets through the Base cross-chain bridge have also dropped by 92.7%, and on-chain activity has decreased by approximately 79.4%. For a Layer 2 network that has not yet launched its mainnet, the indulgence of project parties in market manipulation is bound to raise doubts among investors and increase distrust.
Summary
Coinbase needs to overcome some obstacles to achieve success. Firstly, the U.S. Securities and Exchange Commission has condemned the company’s operation of its crypto business as tying Wall Street together. Secondly, considering that Coinbase needs to directly face fierce market competition, such as Robinhood and Block’s Cash APP, they may find it difficult to provide customers with better and broader services. The final issue is not unique to Coinbase but a problem for the entire crypto industry: the era of insufficient crypto collateral loans has come to an end, and it seems unlikely for many institutions to profit from crypto lending.
At the end of the Coinbase Q2 earnings call, Ben Budish from Barclays Bank raised an interesting question about the difference between Coinbase’s retail users and its “prosumers” or professional traders, with the latter often being less active during less active periods on the platform. Coinbase CEO Brian Armstrong explained, “I think Coinbase needs to make the professional trader product more mature, which may come over time, and we have more work to do.”
However, such an answer seems to be difficult to satisfy investors.
Part of the content in this article is compiled from dlnews.
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