Can Coinbase Keep Wall Street Happy? | David Z. Morris

I’d like to spend this morning writing about yesterday’s announcement that Square will develop what looks like its own Decentralized Finance (DeFi) platform on Bitcoin. But there is hardly any information in the world on the project at this time – even the name is (literally so far) TBD.

We know it will be led by Mike Brock, a former member of the Red Hat team. The idea of ​​building DeFi on Bitcoin, which doesn’t natively support all of the smart contracts required, is exciting and new and frankly a little odd. But I trust Square CEO Jack Dorsey, so I can’t wait to find out more.

But in the absence of that “plus,” let’s talk about how the markets seem so indifferent to this game-changing news, and what it means for other crypto firms – in particular, exchanges.

Bitcoin has risen slightly by less than 1% over the past 24 hours, which is a pretty typical daily fluctuation and cannot be linked to Square’s announcement. For newbies, that’s because we’re at least entering a crypto break, as public interest has been redirected to, among other things, exiting. The search volume for “bitcoin” and “Ethereum” has increased over the past few weeks, and as we will see, so have the trading volumes. Hopefully this doesn’t turn into a full-fledged bear market like the “Crypto Winter” of 2018-2019, but at least for a little while this kind of news might not move the needle as much as it does. would have done closer to the market. top when there were more eyes on the sector.

This is a problem, especially, for cryptocurrency exchanges, which derive most of their money from trading fees. In the past, commercial lulls have resulted in many layoffs and a strategic contraction. But this time around, there’s something new to consider: Among all cryptocurrency exchanges, dormant cycles can be worse for those who are publicly traded.

Long periods of dormancy have so far been found to be typical of crypto, as waves of adoption come and go like tides. These large fluctuations in the public interest are very bad for the bottom line of companies like Coinbase, not only because they make less money, but because Wall Street is not particularly well configured to value companies with this. kind of intrinsic ebb and flow.

But first, let’s take a look at how bad things are! The situation was highlighted last night by Franck Chaparro, chief information officer of The Block, who called trading volumes “falling off a cliff.” But I have seen real cliffs that I would rather fall – aggregate trading volumes have fallen by about 60% since the market peak in May. Some exchanges are doing better than others: Binance, perhaps thanks to its legal issues, is instead at 85%, according to data from CoinGecko. The volume of derivative transactions on FTX is down by roughly the same amount. These may be higher than the aggregate because newcomers were more likely to use these larger platforms. It’s also quite possible that the smaller trades overall will spoof the volume and everyone will be as low as the larger ones.

The volume of trading on Coinbase, by my calculations, is even scarier at 92% from its May peak. Like Jeff Roberts at Decrypt highlighted, this will lead to a pretty crazy situation for the Coinbase stock. They are expected to release their second quarter results soon, but it will be April through June, which includes the peak in May, so this report will likely look great. The report will also include (because the SEC has certain standards) some major caveats about how their outlook for the third quarter – that is, the business actually unfolding at the time – is a small one. absolute dog lunch.

It’s not the type of performance Wall Street likes. Surprisingly, Wall Street likes the numbers to go up – the more consistent, the better. Even if you are a public startup that loses money, you had better be able to lose a little less money each quarter. Coinbase, because it is deeply tied to a market that operates in rather long, slow and deep cycles, will find it very difficult to meet these expectations.

Some Wall Street analysts may be knowledgeable and generous enough to try to account for Coinbase’s unusual position in the market. But most won’t, and they’ll look at the huge gap between the second quarter numbers and the publicly available volumes that actually occur on the same day, and they’ll think, “My god, this stock is terrible.” I would bet there is resistance to even hedging the stock, as analysts’ reputation depends on the accuracy of their calls, and setting a mid-term price target for the Coinbase stock is like trying to guess which way a hand grenade will bounce. (Coinbase has non-exchange income, such as custodial services, but transaction fees are up to 96% of its income.)

Having said that, it undoubtedly creates an opportunity. For many, many years, Bitcoin has been criticized for its volatility, but supporters have said things will work out with enough adoption – enough coins spread over enough hands creates stability. It has started to show signs of realization. In fact, the last two months of relatively tight trading between $ 30,000 and $ 34,000 have been far worse for stock trading volumes than a few wild swings would have been.

By a similar token (pun intended), Coinbase is a long-term bet that the crypto exchange business will diversify and deepen to such an extent that its earnings will smooth out. The Nasdaq and the Intercontinental Exchange, the parent company of the New York Stock Exchange, are both publicly traded, and they’ve been very good long-term bets. If you think the crypto market is going to thrive alongside the stock market in the years to come, Coinbase is probably still a good bet – but maybe wait a few weeks to fill your bags. Many investors have already concluded that they are not interested, which is why $ COIN has fallen 31% since its initial listing. But as the current bloodshed makes its way into Wall Street’s mindfulness, it still has a way to go, at least in the short term.