Shares of Coinbase Global (COIN +5.67%) dropped by as much as 10.4% in trading on Monday as investors speculated that interest rates would stay higher for longer than previously expected. Shares ended the session down 9.2%.
Interest rates and Coinbase
The common perception is that lower rates help the crypto industry. Low rates for safe, interest-bearing investments push more investors into riskier assets, and crypto falls in the high-risk category.
Major crypto tokens often trade correlated to growth stocks, so Monday's reaction makes sense when you think of it as simply a trading move.
But the reality for Coinbase is likely different. Its recent growth has been driven by interest income from the cash on its balance sheet and the interest revenue shares from the USDC token. And higher rates help both of those revenue streams.
It's not all about trading
In the third quarter of 2023, 34% of Coinbase's $623 million in revenue was derived from interest income or stablecoin revenue (interest on stablecoin reserves), so higher interest rates will help the company's bottom line. Moreover, cryptocurrency valuations and trading haven't been hampered by higher rates in the past six months.
I think the market's reaction on Monday got the situation exactly backward: Higher rates are a tailwind for Coinbase's business and should be welcomed by its shareholders.
We will see just how important interest rates are to the company on Feb. 15, when it reports its fourth-quarter financial results. I think there's a lot to be excited about, given the higher trading volumes and elevated rates, but the stock is moving lower in 2024, so the market sees Coinbase's outlook differently.
