In addition to the thousands of cryptocurrencies now in existence, there is another growing group of companies that has sprung up to support the crypto industry. This group includes crypto banks providing payment services to crypto traders, large cryptocurrency exchanges, asset managers, and other custodians that are providing the infrastructure for the crypto industry, as well as other financial services.
While these companies don't necessarily hold cryptocurrencies on their balance sheet, they can trade with a heavy correlation to cryptocurrency prices and volume. Here's one reason this group of stocks may not perform so well in their upcoming first-quarter earnings reports.
Crypto spot trading volume is falling
A lot of the companies that build the infrastructure to support the crypto industry may not hold or personally invest in cryptocurrencies, but they rely on crypto trading volume to power their business. For instance, the crypto bank Silvergate Capital (SI) has built a proprietary real-time payments system that enables two parties on the network to send transactions instantly to one another on the network. This helps better facilitate crypto trading between institutional traders and exchanges because cryptocurrencies never stop trading. Silvergate's payments network doesn't charge transaction fees, but the volume on its payments network drives its whole business.
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The large U.S. cryptocurrency exchange Coinbase (COIN 4.68%) also runs a business heavily dependent on trading volume because transaction revenue is the main way the company makes money. The digital asset marketplace Bakkt is another crypto company that would likely benefit from increased trading volume. However, crypto spot trading volume looks to have declined in the first three months of the year.
Data from crypto exchanges shows that trading volume in January, February, and March of 2022 is lower than in the last five months of 2021. The same can be said for daily trading volume, which has spiked up and dived down but, in general, was lower in the first three months of 2022 than the last four months of 2021.
The slowdown in volume may simply be due to investors taking a break after a great run for cryptocurrencies in 2021. It also likely had something to do with the Federal Reserve's increasingly hawkish outlook that now includes many hikes to its benchmark overnight lending rate this year and the shrinking of its balance sheet.
There does seem to be at least some correlation between crypto spot trading volume and the earnings results at these crypto companies. For instance, when exchange volume soared in April and May of 2021 in the second quarter of the year, Coinbase also generated $1.6 billion of net income in the second quarter, by far its best quarter of 2021. Silvergate didn't have its best quarter of net income in Q2, but it wasn't far off, and the bank also saw the highest volume of the year come through its payment platform in Q2.
Reduced spot volume may be a headwind
Ultimately, lower spot trading volume has likely been a headwind for crypto stocks like Coinbase and Silvergate during the beginning months of 2022. It may not completely derail the business, as there are other factors that can impact these stocks. For instance, Silvergate benefits tremendously from rising interest rates. But crypto spot trading volume is one of the main aspects that drive the core businesses of this group of stocks, so investors should take this into account with earnings season upon us.
