It hasn't been an easy year for Coinbase Global (COIN +0.31%). Shares are down over 80% from their 52-week high and 75% year to date. The innovative company has a "first mover" advantage in the nascent cryptocurrency industry and serves as a "stand-in" with institutional investors, which worked in its favor while the price of Bitcoin (BTC 0.67%) and other cryptocurrencies surged in late 2020 and through 2021. But as Bitcoin and other cryptos have fallen from their all-time highs, investors have soured on Coinbase as well. However, even after the steep year-to-date declines, Coinbase may not be out of the woods yet, and a recent development in the space is something that potential investors looking to buy the dip on Coinbase need to consider.
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A looming threat
That recent development is not one driven by Coinbase itself, but rather a move by an emerging competitor, Binance.US. Binance.US announced it will eliminate trading fees on Bitcoin, in a move reminiscent of traditional brokerages eliminating commissions on buying and selling stocks over the last few years.
Binance.US is no small matter for Coinbase, either -- while the U.S. arm of Binance may not have quite the same profile with casual observers as Coinbase, in part because it is not publicly traded, parent company Binance is actually the world's largest crypto exchange. Binance's high-octane CEO Changpeng Zhao, known within the crypto community as CZ, feels that his company is in a position of strength amid the current crypto carnage, saying that they have built up a "war chest" and that they are eyeing "50 to 100" deals to invest in or take over smaller platforms and competitors, which would add even more to its significant scale.
The United States arm of the company was recently valued at $4.5 billion in a $200 million seed funding round in April, the company's first time raising external capital in the United States. Binance.US plans to use this funding to improve its trading platform and to boost marketing, both of which add to concerns for Coinbase. Binance.US' CEO Brian Shroder says that the company is on track for an IPO in the U.S. in the next several years, which would both give it more funding to compete with Coinbase and raise its profile with investors and the general public. Binance.US is currently available in 46 states. At a time when Coinbase is laying off 18% of its workforce and even rescinding job offers, Binance.US has ramped up hiring since late last year when Shroder took over and is said to have doubled its headcount in that time.
NASDAQ: COIN
Key Data Points
Race to the bottom
The elimination of commissions can create a "race to the bottom" in which competitors feel forced to cut or eliminate their own commissions to keep up with Binance in an environment where competition for customers is intensifying. To be clear, Binance isn't eliminating commissions on trades of other cryptos beyond Bitcoin at this time, but Bitcoin makes up over 40% of the total crypto market cap and is the main asset driving trading on most platforms. The company could eliminate fees on other assets in the future, which would put additional pressure on Coinbase. Binance.US says it will not be making money from spreads (the difference between the bid price and ask price), like Voyager Digital (VYGV.F +0.00%) or Robinhood (HOOD 0.99%), but would instead make money from activities like staking.
Analysts are already worried that trading volume will be down as cryptocurrencies endure a bear market, so reduced or eliminated fees will be even more painful given this backdrop.
The big picture
Taking a look at the bigger picture, Coinbase is still an innovative company and a key player in the industry, and could well rebound when crypto prices enter their next upcycle. However, the looming fee compression means that it could become an even more challenging short-term setup beyond just falling prices. Coinbase could still be a good long-term investment, but given the potential for fee compression against an already challenging macro and industry environment, it seems likely that shares likely have further to fall before becoming a buy.
