What happened
Shares of cryptocurrency exchange Coinbase Global (COIN +3.87%) pulled back slightly on Tuesday as did the price of popular cryptocurrencies like Bitcoin (BTC +3.38%), Ethereum (ETH +10.31%), and Dogecoin (DOGE +7.05%). As of 3:30 p.m. EDT, Coinbase stock was down almost 4% for the session. And over the past 24 hours, Bitcoin, Ethereum, and Dogecoin were down 2%, 1%, and 3%, respectively, according to CoinDesk.
These are relatively small moves and inside what should be considered normal for day-to-day volatility of stocks and cryptocurrencies. That said, the U.S. infrastructure bill might have something to do with these small pullbacks. Here's why.
Image source: Getty Images.
So what
On Monday, the U.S. Senate voted to approve the $1 trillion infrastructure bill without amendment. That's actually a potential problem for the cryptocurrency space because the bill contains a provision for digital assets. Critics include Coinbase, which says the bill, in fact, needs amendment. Otherwise, the definition of a broker is too broad and could be interpreted to include cryptocurrency mining companies.
Hypothetically, the bill could put new regulations on cryptocurrency mining companies, which may discourage mining activity. In that scenario, blockchain networks could become less stable, reducing demand among investors for cryptocurrencies.
Early yesterday, there was still hope that the digital asset provision would be amended to make the language clearer. However, amendment proposals needed unanimous consent from the Senate, which it didn't get. Because of this, the infrastructure spending bill passed today and it still contains the broad definition of a broker. That might be why these cryptocurrencies pulled back a little today.
Now what
According to CoinDesk, amending the digital asset provision has bipartisan support in the U.S. House of Representatives. So there's a chance this issue still gets resolved before the bill is signed into law. But for Coinbase, the company has a much more pressing issue: its quarterly financial results are scheduled for release after the market closes today.
For perspective, Coinbase's primary driver of revenue comes from transactions made by retail investors. In other words, the more retail investors trade, the more money Coinbase makes. The company's second-quarter results will cover April through June, and some cryptocurrencies were more volatile than others over that span of time, as the chart shows.
Bitcoin, Ethereum, and Dogecoin price data by YCharts.
Therefore, it's really hard to predict how overall trading volume will be for Coinbase when it reports.
According to MarketWatch, the average analyst estimate predicts Coinbase will earn $2.32 per share in Q2. For perspective, that would be down significantly from the earnings of $3.05 per diluted share in the first quarter. From here, analysts expect Coinbase's profits to keep falling, too, predicting just $1.45 per share in the still future third quarter.
If Coinbase exceeds Wall Street's expectations in Q2, the stock could jump tomorrow. Moreover, if management issues upbeat guidance, it would be easy to impress analysts. That said, last quarter Coinbase management refrained from giving hard financial guidance, noting that it's hard to predict volatility. For that reason, I wouldn't expect too much guidance from management again today.
Since investors shouldn't expect much guidance from Coinbase, here's one thing to look for when it reports: its plans to diversify its business. In Q1, 94% of revenue came from retail investor trades, and Bitcoin represented 50% of the total trading volume. Simply put, if retail investors stop trading in and out of Bitcoin, Coinbase would suffer.
Coinbase can become a better long-term investing option if it can demonstrate optionality beyond trading Bitcoin. I'll be looking for signs of this when the company reports later today.
