Coinbase's Grip on Crypto Faces Test in a Market That Won't Slow Down

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4 days ago

(Bloomberg) -- Coinbase is the closest thing crypto has to a blue-chip name: a booming exchange that joined the S&P 500 this year and at one point surged 69% to a $106 billion market value.
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That streak just hit a wall. The stock plunged 17% last week after disappointing results, in its second-worst post-earnings drop. Analysts question whether Coinbase can keep using its pricing power to defend margins, without ceding ground to lower-cost rivals.
The firm has long defied warnings that competition would force it to slash fees — even raising them on a set of stablecoin trades in March. But competitors like Kraken and Robinhood are chasing market share. And Gemini and Bullish are preparing for potential public listings.
'We still see long-term risks to their growth due to above-average retail transaction fees and increasing competition from platforms like Robinhood,' said Alex Woodard, an analyst at Arca. 'Coinbase needs to implement cheaper trading fees and continue to expand its product offering through M&A in order to avoid losing market share.'
Robinhood, known for zero-commission stock trading, has an average take rate roughly 50% lower than Coinbase's, according to Mizuho, while Kraken has added stocks and exchange-traded funds to keep users engaged. Bitcoin, which drives much of the industry's mood and trading activity, has also steadied.
Brian Armstrong co-founded Coinbase in 2012 and made it the first major crypto exchange to list publicly in 2021. That head start helped cement its role as the industry's default platform for retail traders and institutions in the US.
Coinbase's revenue grew 3% last quarter, its slowest in two years. Kraken's sales rose 18%, while Robinhood's crypto business nearly doubled to $160 million. Coinbase's global market share edged lower from 5.65% to 4.56% before a small rebound in July, according to analyst estimates. For now, it still commands more than half of the US spot market, a reminder of its scale.
The broader backdrop remains bullish. Most analysts remain positive on the stock, as Bitcoin ETFs pull in billions and stablecoins hit record volumes. That rising tide means Coinbase could keep growing its revenue even if its market share — always volatile — slips. The question for investors is whether that growth is already priced in, and whether rivals like Robinhood or Kraken could chip away enough business to test its premium.
The firm attributed part of the trading slowdown to a deliberate pricing decision to charge for some stablecoin pairs, historically largely a zero-fee product.
'This was in our control,' said Alesia Haas, Coinbase's chief financial officer on last week's earnings call. 'When you exclude the impact of lower stable-pair volume, our total trading volume was more similar to the overall spot markets,' she told analysts.
In other words, it was a bet on margins over market share — one that rivals may soon test.
'As more players enter crypto, it's a sign the space is going mainstream,' a Coinbase representative said in an email. 'That's good for the ecosystem, but we're here to win.'
That trade-off highlights Coinbase's bind: cut prices and hurt margins, or hold firm and risk losing traders. Still, the company has often managed to keep fees steady or even increase them over the years, despite warnings from naysayers. Coinbase is planning to offer stock trading to expand its grip with clients.
'Exchanges have to become one-stop shops,' said John Todaro, an analyst at Needham & Co. 'But every competitor is chasing that same strategy, which makes the fight even tougher.'
For investors, this is bigger than a single earnings miss: The stock has long been a favorite of large money managers — pensions, financial advisers, and cautious funds — because it offered a 'safer' way to get crypto exposure through a regulated, publicly listed company. While he believes Coinbase can continue to do business without dropping fees, 'either way, being so fully dependent on crypto trading is risky,' said Dan Dolev, an analyst at Mizuho.
That dependence has led to what Todaro calls 'lumpy revenue growth, with some years of big gains and others of modest or even negative results.'
The company has plenty of firepower, with more than $9 billion in cash and revenue from its partnership with stablecoin issuer Circle Internet Group. The firm runs a custody business — crypto safekeeping for investors such as Bitcoin ETFs — that ties it directly into Wall Street's flows. And it's trying to become an 'everything exchange,' recently adding perpetual-style futures contracts in the US, buying the crypto options platform Deribit, and planning to list stocks and even prediction markets.
Rivals aren't slowing down either. Aside from Kraken and Robinhood, OKX has re-entered the US. And Binance, despite its past legal troubles, had explored doing business with World Liberty Financial Inc., one of the Trump family's crypto ventures, Bloomberg has reported.
'Binance and HTX have been the primary beneficiaries of spot market share growth this year globally,' said Saksham Diwan, research analyst at CoinDesk Data. 'In the US, Kraken has recorded the most significant gain in spot market share, although Coinbase still retains the vast majority of the spot market, with over 50% share in the US.'
Coinbase trades at about 44 times forward earnings — richer than traditional exchanges, but still lower than Robinhood at 65, and nowhere near Circle's lofty multiple. H.C. Wainwright, which downgraded Coinbase in July, cautioned that competition could pressure its premium.
Oppenheimer's Owen Lau expects a 46% revenue rebound in the third quarter, and sees the recent stock drop as a buying opportunity.
'I don't think COIN's valuation is out of reach,' Lau said. 'It is trading at a big discount compared to HOOD and CRCL. I think if they can continue to grow both top and bottom line, it will help.'
But that optimism rests on Coinbase's ability to hold its margins in a market where trading is becoming a commodity, and rivals look all set to cut costs anew.
--With assistance from Lu Wang.
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