Coinbase, a major cryptocurrency exchange, is actively seeking to diversify its sources of revenue as it grapples with its heavy reliance on cryptocurrency trading activities, particularly Bitcoin and Ether. As of the latest data, these two cryptocurrencies consistently represent approximately 50% of Coinbase’s trading activity.
In an effort to diversify, Coinbase has expanded its list of tradable assets from just over 100 currency pairs in 2021 to more than 600 today. However, analysis by Coin Metrics, a cryptocurrency data provider, suggests that adding more tradable assets does not necessarily translate to increased trading fee revenue. This underscores Coinbase’s continued dependence on trading volumes for profitability.
To diversify its revenues, Coinbase has introduced non-trading income sources. This includes a service that enables users to lend their tokens in exchange for yield. Additionally, the company has seen growing income from the reserves backing its stablecoin, USDC, as yields have risen. Nevertheless, Coinbase’s financial performance remains closely tied to trading volumes.
Company executives have expressed their intention to diversify away from trading revenues. They envision Coinbase becoming the primary interface for users to engage with various aspects of the cryptocurrency ecosystem, beyond just being an exchange platform.
However, current indicators suggest that cryptocurrency trading activity may not rebound in the near future. Daily trading volumes across exchanges are approximately half of what they were last year and less than a fifth of the peak volumes during the 2021 cryptocurrency boom.
Coinbase’s stock price has surged by 101% to $70.96 this year but still remains significantly below its 2021 peak of over $340. Meanwhile, Bitcoin has experienced a 60% increase to $26,500 but has not yet returned to its historical high of $64,000.
The potential launch of a spot Bitcoin ETF, following a court ruling in favor of Grayscale Investments’ bid to convert its Bitcoin Trust into an ETF, could have mixed implications for Coinbase. While it may boost Bitcoin’s price by providing investors with a simpler and potentially cheaper way to buy and hold Bitcoin, it could also impact Coinbase’s user base.
Coinbase is currently facing a lawsuit from the Securities and Exchange Commission (SEC), which accuses the company of operating as an unregistered securities exchange. Coinbase denies this allegation and is challenging it in court. Despite these legal challenges, Coinbase’s executives remain optimistic about overcoming the hurdles and reviving trading activity based on historical patterns. The outcome holds significant implications for Coinbase investors.