Crypto Winter May Be Harsh for Coinbase


The weather is getting hotter outside, but Coinbase Global COIN -26.40%

prepares for a harsh winter.

Even before the drop in the price of bitcoin and other cryptocurrencies this month, Coinbase COIN -26.40%

was recording a sharp decline in activity on its platform in the first quarter, the company reported on Tuesday.

The number of users of monthly transactions fell more than 2 million from the fourth quarter to the first, to 9.2 million. Trading volume fell 44% during that period and total transaction revenues were 56% lower. The company said cryptocurrency volatility continued to decline through April, reaching its lowest level since mid-2020, and expects users of monthly transactions and trading volumes to be lower in the second quarter.

The company has long anticipated another possible deep freeze period for cryptographic activity. CEO Brian Armstrong said in the company’s earnings call on Tuesday that Coinbase has gone through the past cycles of cryptocurrency and now sees an opportunity to focus on building the future instead of struggling to keep up with the hectic activity. “Ironically, I’ve never been so optimistic about where we are as a company,” he said.

However, the company’s investors could use a dose of everything to make it so optimistic, as Coinbase shares have lost about three-quarters of their value so far this year. Given how difficult it is to predict the cryptocurrency cycle, when it could turn around and how big the next wave will be, investors should look for other measures of the company’s underlying economy. One positive point is that the rate of retail tariffs, or how much revenue from retail transactions is generated as a percentage of retail trading volume, actually increased during the first quarter from the fourth. There has long been concern that this rate, now at 1.31%, will drop sharply over time. The fact that you don’t have it can be an indicator that Coinbase’s relatively established brand is worth something to customers and that their pricing strategies are working.

Still, that resistance was offset in the quarter by a drop in fees paid by entities. Institutional transactions make up the bulk of Coinbase’s volume, although they generate a fraction of the revenue generated by retailers. The institutional rate fell during the first quarter, which the company attributed to a change in the rate structure for market makers. Institutional trade also accounted for an even larger share of volume than in recent quarters.

There is the long-term potential to expand the business into non-commercial cryptographic activities. For traditional asset brokerages, one way to offset a decline in active trading is by offering passive, higher-yielding investment products or paying interest on cash to continue attracting assets while earning more with loans. Robinhood Markets said this week it would raise the available interest rate on uninvested money to 1%.

The number of Coinbase users committed to revenue-generating products rose from 3.6 million to 5.8 million in the most recent quarter, which the company said was driven in large part by the launch of “participation” in the network. Cardano block chain. Staking is a way to get a form of performance by earning rewards for participating in a network. On average, in the first quarter, more than half of users who made monthly transactions were using products beyond the trade, such as staking, according to the company. Revenue from subscription and non-transaction services fell 29% from the fourth quarter to the first, although they were still close to three times what they were a year ago.

Still, the future potential of cryptographic performance has its own uncertainties. On the one hand, there are the regulators: Coinbase did not launch a loan product planned to pay off the yield last year after the Securities and Exchange Commission threatened coercive measures. It is unclear how or how these offers may return. People may also look for performance in the broader ecosystem of “decentralized finance,” but some may be more reluctant to do so after the volatility surrounding TerraUSD. Among the drivers of the recent growth of algorithmic stablecoin has been its use in a loan protocol that has allowed investors to obtain returns of almost 20% per annum.

Coinbase can be smart to plant seeds to grow before winter arrives. But investors still shouldn’t start dreaming about spring flowers.

WSJ’s Dion Rabouin explains why Wall Street is now so committed to cryptography and what it means for the new asset class and its future. Composite photo: Elizabeth Smelov

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