Coinbase, an online trading platform for the “buying, selling, transferring and storing” of digital currency, which has expanded to offer over 25 cryptocurrencies since its launch in 2012, including Bitcoin, Ethereum and Litecoin, saw an initial surge when it launched on the NASDAQ on the 14th April, shooting up 72% from its direct listing at $328.28 to $429.54. Yet, its subsequent, near-immediate plunge, which sits at $280.66 as of the 5th of May, a 13.55% drop from its IPO, has manifested the continuing presence of scepticism in the crypto space, or rather the uncertain sustainability of Coinbase.
Having said this, the public listing of Coinbase is significant in exemplifying the mainstream adoption of Bitcoin and cryptocurrencies, no more clearly seen in the last year, where Bitcoin has risen from ~$9000 in January 2020 to peaking at ~$64,000 on the 13th April 2021. However, despite the 800% and 1300% rise of Bitcoin and Ethereum respectively in the last year, several limiting factors make the future of such cryptocurrencies, and consequently their trading platforms like Coinbase, more doubtful.
Owing to cryptocurrency not being in the mainstream financial system, and thus an additional money supply which the government cannot control, there has been increasing uncertainty as to how the crypto space and its trading platforms will be regulated. In February 2020, the Bank of America warned of a potential market disruption through imposing anti-privacy government measures or an increase in customer reporting information required. The effect of such concerns is clear; on the 87th April 2021, Bitcoin plummeted from $62,000 to $55,000, following the rumours that the US authorities were set to clamp down on the use of cryptocurrency in illicit transactions, as well as the Turkish ban on Bitcoin. Although the stock price has since recovered, it nevertheless demonstrates investor anxiety at the prospect of greater regulation.
While there have been numerous cryptocurrency regulations imposed, such as the UK’s AML requirement for Customer Due Diligence and the FCA’s ban on crypto derivatives at the start of 2021, the anonymous nature of crypto-trading has proved problematic, and thus that further regulation is necessary. Despite the increased regulation that platforms must carry out due diligence on their customers, the fact that traders can remain anonymous has facilitated money laundering and tax evasion owing to the difficulty in tracing criminal activity. Additionally, in 2020, a value (from January 2021) of $3.8 billion was stolen through 122 attacks, including 28 attacks on blockchain wallets, valuing $3 billion, and 47 attacks on decentralised apps running Ethereum at a value of $437 million. Although Coinbase is a fully regulated and licensed platform for cryptocurrency exchanges, this nevertheless demonstrates the pressing need for increased regulation to protect investors and the cryptocurrency space from such criminal activity.
Despite COIN’S 2021 Q1 earnings, which included a nine-fold increase of revenue from the previous year to an estimated $1.8 billion and an estimated $100 billion market cap, their business model, which is heavily reliant on trading commissions, has fostered doubts about their sustainability. 86% of Coinbase’s 2020 revenue was from trading commissions, while in their 2021 Q1, their transaction fee was set at 4% - 46 times the fees of NASDAQ and the NYSE. The trend of falling commission rates over the last decade, along with the growing competitors to Coinbase, such as Square’s Cash App and Bitstamp could force Coinbase to drive down their fees and thus significantly cut into their revenue. On top of this, the pressure of zero-commission stock trading created by the likes of PayPal, who have started enabling Bitcoin transactions on their system, too, poses a problematic challenge for Coinbase’s future.
Despite the potential attraction of Coinbase to investors as a hedge against investing in crypto-currency, and thus as a slightly less risky avenue into the crypto-market, the dominance of Bitcoin and Ethereum on their trading platform makes this almost negligent. Moreover, the crypto market as a whole is very volatile and fuelled by emotion, as seen on the 18th April 2021, when the $220bn of crypto market capitalisation was effectively wiped within an hour. This instability not only creates risks for investors but also makes it unlikely that Bitcoin will fulfil its plan of becoming a primary means of exchange, owing to the magnitude of its fluctuation. Rather cryptocurrency has become, and will likely stay, a means of investment and a store of value against inflation, and particularly the growing uncertainty around the U.S dollar’s future purchasing power. Therefore, owing to cryptocurrency possessing no intrinsic value and relying on investor attitudes, their future is almost impossible to predict – an unnerving prospect for many investors.
Following the trajectory of the last few years, we are likely to see the legal industry continue to crack down on regulation of the crypto space and protection against hackers and money laundering. In addition to this, the UK government have the added challenge of forging its own regulatory path in cryptocurrency as a result of Brexit. This paves the opportunity for the U.K to position itself as a global fin-tech hub through attracting crypto investment in the UK without the heavier regulation imposed in the EU - if they can prove to balance this with maintaining access to the EU markets and are willing to embrace bitcoin and the crypto sector.
Overall, despite the unsuccessful run of Coinbase so far and the imminent regulation cryptocurrency is likely to face, I don’t believe cryptocurrency is going away anytime soon. Rather, Coinbase is likely to face challenges as a result of growing competition in the crypto space and thus have to alter its business model to stay both competitive and profitable. Having said this, if other trading platforms follow Coinbase in going public, this will continue to present the opportunity for investors who may be hesitant to buy directly into a volatile cryptocurrency to instead buy into a company, and thus potentially create a new wave of investors into the crypto-space through a slightly less risky route.