Will Coinbase be the last crypto exchange standing?
Coinbase (NASDAQ:COIN), one of crypto’s most recognisable public faces, has had a difficult last 12 months.
The exchange’s main source of revenue, retail trading fees, saw a significant decline in 2022 as trading volume slowed and investor trust was tested across the industry.
The company’s share price is hovering above post-IPO lows and the company has had to enact a campaign of cost-cutting measures. In separate announcements, Coinbase has said that it will reduce its headcount by 20% and discontinue its services in Japan. It only gained its operating licence from Japan’s Financial Services Agency regulator two years prior.
Coinbase is not the only crypto-native exchange feeling the whiplash of ambitious over-expansion triggered by the euphoria of the 2020–21 bull cycle. Kraken, a competitor with which it has vied for American market share, has also put a pause on trading in Japan in an effort to scale back capital expenditure.
Gemini also looks to be on the brink with customers unable to withdraw around $900 million in deposits from its defunct high-yield programme Gemini Earn. It administered the platform with crypto lender Genesis that has now filed for Chapter 11 bankruptcy. The SEC has levelled securities fraud charges against both parties.
Regulators have been on a war footing against crypto exchanges in the wake of the implosion of FTX. The Department of Justice (DoJ) sent the market into a brief panic last week after it announced it was taking punitive action against a major crypto company engaged in money laundering. The panic turned out to be short-lived after it surfaced that the target was Bitzlato, a largely unheard of Russian-owned exchange with only $11,000-worth of user deposits on it.
But the message was clear enough: regulation hawks are coming after crypto exchanges functioning in the US.
In contrast, digital asset management firms like ETC Group are fully regulated counterparties that offer investors exposure to digital assets in the UK and in European markets through exchange-traded products (ETPs).
ETC Group investors don’t have to worry about losing access to their funds as our ETPs such as BTCE (Bitcoin) and ZETH (Ethereum) are 100% physically collateralised and stored with whitelisted custodians in cold storage.
It is no secret that the world’s largest crypto exchange, Binance, has been on the DoJ’s hit list for some time now. The Department of Justice began its criminal investigation into Binance in 2018 over concerns that it was failing to comply with US anti-money laundering laws and sanctions.
Binance commands the largest spot trading volumes in the world and its strong balance sheet has opened the path to strategic takeovers of struggling firms in regional markets. It recently gained a licence to operate in Japan after it acquired Sakura Exchange BitCoin, an exchange registered with Japan’s market watchdog.
According to Reuters, the DoJ has been dragging its feet on prosecuting the exchange because it is split on whether to act on its present findings or to continue to review the case it has built. If Binance is brought to court, it could lose the airtight grip on the crypto industry it gained after the upending of rival exchange FTX.
However, financial institutions remain more confident in the long-term fortunes of Coinbase, given its legitimacy as a publicly-listed company in America with a proven record of regulatory compliance, specifically with regard to its yield-bearing Lend programme.
Investment bank Oppenheimer has underlined that Coinbase has the makings to be “one of the few long-term survivors” in the cryptoasset space on the basis of its cash flows, executive level staff, and nimble ability to slash workforce numbers when necessary.
Coinbase is a part owner of USDC, a stablecoin pegged to the US Dollar that is the fifth largest digital asset by market cap. This is a supplementary source of revenue for the exchange that collects interest payments on the stablecoin’s reserves. In Q3 2022, Coinbase received $101 million in interest income from USDC in light of rising interest rates.
The asset management firm Ark Invest have been long-term believers in disruptive companies like Coinbase and spent most of December accumulating COIN shares at lowered valuations. After buying more than 300,000 shares of the exchange in December, Ark purchased another 158,000 shares for $34.78 on 30 December.
At the time, this was worth almost $5.5 million. Fast-forward three weeks and the same haul is worth around $8 million.
The recent cryptoasset market rally has fuelled the stock price of Coinbase and other companies with exposure to crypto. Investors that bought Coinbase shares before the New Year would easily be in the green with its stock up 59% YTD in an impressive turnaround.
Coinbase has accrued legitimacy as a public company with a proactive approach to regulatory compliance (unlike, as should be abundantly clear, Binance).
And if Coinbase survives this bear market, it will be one of the biggest players left standing.
