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Coinbase
Global, the leading U.S. cryptocurrency exchange, is highly dependent on Bitcoin. But Bitcoin is becoming a smaller overall part of the crypto-economy, and that could pose a problem for Coinbase.
If other coins that aren’t supported by Coinbase (ticker: COIN) start to dominate the industry, the company may lose market share to other exchanges that list those coins.
The shift in the crypto market away from Bitcoin dominance was one topic on Coinbase’s earnings call late on Thursday after the company released its first-quarter earnings. Investors had mixed feelings about the earnings report, which showed Coinbase’s fast growth but also highlighted how competition could affect the company’s results. Shares were up 1% in midday trading Friday.
Bitcoin was once the unquestioned king of cryptocurrencies, making up more than 90% of the crypto market at the start of 2017. Its market share has since declined, as more coins have been introduced and gained in value. But Bitcoin still made up about 60% of the total crypto market cap in 2020, and was even around 70% at the start of 2021 as Bitcoin’s value surged. Since then, Bitcoin has risen in value but other coins have risen even more. In the past week, Bitcoin has dropped 12% even as Ethereum — the second most valuable cryptocurrency, has risen 5%. Bitcoin now makes up about 40% of the total $2.3 trillion market cap of cryptocurrencies.
In the past, cryptocurrencies tended to move in tandem, with nearly all of the top 50 coins heading in the same direction on any given day. But that has now clearly changed.
So far, it’s not clear whether Bitcoin’s relative underperformance is significantly hurting Coinbase’s results. Bitcoin makes up 62% of the assets on Coinbase’s platform, meaning its customer assets are more heavily weighted toward Bitcoin than its portion of the overall crypto market cap would imply.
But as far as trading volume on the platform is concerned, it appears that Coinbase users are more similar to the broader market. In the first quarter, Bitcoin made up 39% of total volume on Coinbase, about equal to its current market cap. And Ethereum made up 21%, also close to its cap. But other coins — some not supported by Coinbase– are clearly becoming more popular.
The most promising of those is Dogecoin, which started as a joke cryptocurrency but has surged in popularity and been embraced by celebrities like Tesla (TSLA) CEO
Elon Musk.
It traded below a penny at the start of the year, and is now worth more than 50 cents. Coinbase doesn’t support it, but brokers like Robinhood and Webull do.
The surge in the price of Dogecoin coincided with a surge in crypto trading volume at Robinhood that has caused outages on that platform multiple times in recent weeks. Currently, Dogecoin accounts for the most volume of any cryptocurrency on Webull, according to CEO Anthony Denier — more than Bitcoin or Ethereum. Coinbase CEO Brian Armstrong said on the company’s earnings call that Coinbase planned to add Dogecoin in the next six to eight weeks.
Coinbase has been accelerating its additions of coins. At the start of the year, it supported 90 cryptocurrencies, but by the end of the third quarter it supported 108. Going forward, the company expects to move even faster.
“There’s no doubt that we need to accelerate the process by which we review assets and we add them to the site, because we’re quickly going to be in a world here where there’s so many that we’re not going to be able to keep up, unless we accelerate that process,” Armstrong said on the earnings call.
Coinbase may have to be the first to list a coin in order to stay ahead of the market, the CEO noted. Its faster process was evident this week, when it listed a new coin called The internet Computer immediately after it was launched on Monday. The value of that coin skyrocketed, and it was worth nearly $40 billion as of Friday.
Adding a new cryptocurrency is tricky, though. It’s not as easy as adding a new stock to an exchange, for instance. Coinbase reviews the coin’s tech specifications, user base, and any potential legal issues, among other factors. It’s not clear if the company has any liability if it lists a coin that is later considered a security by the Securities and Exchange Commission for instance — a designation that has become a major issue in crypto. If people are selling securities without the disclosures that U.S. law demands, regulators could get involved. Coinbase has previously had to remove a coin from its platform after legal action against the coin creator.
In the longer run, Bitcoin’s waning dominance may actually help Coinbase, if it can stay ahead of the market while also staying on the right side of regulators. While it may be losing some customers to Robinhood today, Coinbase is arguably in a better position than its non-crypto rivals because its platform and trading system are designed to handle new cryptocurrencies.
Write to avi.salzman@barrons.com