What happened

Shares of the large crypto exchange Coinbase (COIN -2.87%) plummeted more than 81% in the first six months of 2022, according to data provided by S&P Global Market Intelligence. The main reasons for the huge decline are falling cryptocurrency prices and less crypto-trading activity.

So what

Being the largest U.S. crypto exchange, Coinbase makes the bulk of its revenue from commissions on retail trades, so naturally, the stock has a good amount of correlation to the price and movement of large cryptocurrencies like Bitcoin (BTC -2.23%).

The price of Bitcoin fell roughly 58% in the first half of the year as inflation set in and the Federal Reserve rapidly raised its benchmark overnight lending rate, the federal funds rate. This usually does not bode well for riskier assets because it makes safer assets yield more.

In the first quarter of this year, Coinbase reported $1.16 billion of revenue, down from nearly $2.5 billion in the fourth quarter of 2021 and nearly $1.6 billion in the first quarter of 2021. The main culprit was the decline in retail-transaction revenue.

But the fall in the price of Bitcoin and other cryptocurrencies has not been the only issue. Coinbase has also seen the fee it charges on retail trades cut significantly as more competition piles into the space. Coinbase currently charges 1% on all crypto transactions, according to its website. That number used to be as high as 4%.

Not too long ago, some of Coinbase's competitors eliminated fees altogether on certain crypto trades, making investors fear that fees at Coinbase could drop further.

What now

While Coinbase has suffered as the crypto winter has set in, there's no doubt that the company will need to figure out how to diversify revenue with fees facing further compression.

Coinbase is clearly aware of the situation and has made efforts to do this, including launching a subscription service and offering users more ways to use the platform other than just trading.

CEO Brian Armstrong noted on the company's last earnings call that 54% of active users are on Coinbase for something other than just trading, including interacting with merchants, yield farming, and interacting with decentralized applications.

Although Coinbase could face more pressure near term, with its size and brand power, I do think it will continue to find ways to stay relevant so long as cryptocurrencies stay relevant.