Coinbase Global (COIN 0.69%), the biggest American cryptocurrency exchange, has had a terrible year so far. Coinbase has dominated headlines in 2022 thanks to disappointing first-quarter earnings, a hiring freeze followed by broad layoffs, and macroeconomic factors that have sent crypto into a tailspin. Analysts and investors alike tend to conflate Coinbase with crypto and crypto markets – but it is time to separate Coinbase from crypto and ask some hard questions about the company's strategy, instead of assuming that its shortcomings are merely reflections of crypto volatility.
The company's first-mover advantage is evaporating, and this is particularly concerning due to its revenue mix. Yet Coinbase's strategy depends on an indefinite first-mover advantage. How did it get to this point?
Coinbase was a first mover in cryptocurrency
Coinbase's role in shaping crypto markets and adoption cannot be overstated. Founded in 2012, a time when most lay-people had only heard of Bitcoin in the context of the dark web, Coinbase developed one of the first US-based cryptocurrency exchanges. Crucially, Coinbase targeted the self-directed individual investor, which opened up cryptocurrency to markets beyond the digital subcultures of the tech-savvy enthusiasts who had been involved in Bitcoin since its inception. These factors gave it a moat by default during a time when it had very few competitors. For many years, Coinbase's role as a fiat on-ramp through which investors could change dollars to Bitcoin or Ethereum allowed US-based investors to buy crypto with ease. It's indisputable that Coinbase has played a powerful role in driving broader interest in cryptocurrency investing, as well as in bringing institutional money into cryptocurrency. But does its first-mover role still matter in today's cryptocurrency landscape?
NASDAQ: COIN
Key Data Points
Coinbase's strategy has grown stale
Most of Coinbase's revenue comes from charging fees on transactions, and the lion's share of Coinbase's transaction revenue still comes from retail investors-the self-directed individuals who invest for themselves using a customer-facing app instead of a traditional brokerage. As crypto has become normalized and institutionalized, competitors have developed both crypto trading platforms as well as easy crypto onramps that are embedded into traditional FinTech platforms. While the new crypto investors of 2015 defaulted to Coinbase because there were few other options, today's new retail investors can enter the crypto economy with Gemini, BinanceUS, or FTX. Even crypto-skeptics can invest a few dollars into Bitcoin using mainstream financial apps like PayPal's Venmo, Block's Cash App, or Robinhood. These new options are good signs for the long-term adoption of crypto, but portend poorly for Coinbase's revenue strategy.
Whether these new users onboard via FinTech or via Coinbase's direct competes, they are not paying Coinbase's high fees. Yet the company's revenue model relies on individual retail investors paying proportionally high fees, which subsidize high-value institutional accounts. On average, the value of retail customer transactions represents less than a third of Coinbase's overall trading volume, but over the past year, the fees levied on these transactions have contributed as much as 96% of Coinbase's total transaction revenue. Meanwhile, the overall revenue from these retail consumer transactions has declined by more than a third since this time last year. If the vast majority of Coinbase's revenue is supposed to come from slapping high fees on high-volume, lower-value transactions from retail customers while offering heavily discounted rides to whales, then it is unsurprising that those same retail investors are flocking to new market entrants who court them with lower fees. Those investors don't need Coinbase the same way they did only a few years ago.
The problem is that Coinbase still needs those customers...or at least, its current business model does.
Coinbase must find a flip side to its fading first-mover advantage
Being the first mover is not a sustainable competitive advantage. Once competition enters a market, it is not enough to be the first. Yet Coinbase's revenue strategy assumes that retail investors will pay high fees because they have few other options. Continuing to rely on a revenue strategy that depends on perpetual first-mover advantage is naïve at best – particularly when that strategy assumes a market with few or no competitors. More importantly, this strategy exists regardless of cryptocurrency's volatility. Coinbase needs to be accountable for its business decisions, and those should be separated from the market. If the company intends to rely on retail investors' revenue for the long haul, then Coinbase must shift its strategy and differentiate itself from competitors by offering a clear and compelling value proposition to those customers. But will it?
