When cryptocurrencies drop, it’s more a race to the bottom like usual. However, in the beginning stages of a cryptocurrency market drop, the bigger coins are kind of like the bellwether indicators to signal how the rest of the cryptocurrency market is likely to perform. It’s similar to watching the Dow Jones Industrial Drop (DJIA), and so likewise even your most defensive portfolio stocks drop.
However, we’re talking about Ethereum (ETH/USD) here, and it’s comparative to owning an NASDAQ ETF versus the S&P 500 (which is like Bitcoin) in cryptocurrency terms, and yup, ETH just dropped by -30% in a single trading session. As of May 19th, 2021 the coin is hovering between $2,100 – $2,300 towards the afternoon session during PST. Traders of Ethereum would have to go back to 2017 to recall the last time ETH dropped by -30% in a single session. A lot of selling was driven by regulatory probes involving ICO busts & scams.
We anticipated that Ethereum would probably lose momentum, and that $2,500 would be the low-end of our Ethereum price range, which we had discussed in an article titled: Bitcoin, Ethereum, Binance, and Dodgecoin Price Analysis. However, as we have witnessed with today’s volatility in Ethereum, the price is already below our $2,500 price range. It might break below $2,000 in the near-future at the rate this market selloff is unfolding.
Figure 1. Ethereum 1-Year Price Chart
Source: CoinMarketCap
As you can tell, the losses are starting to really compound for Ethereum holders, and the latest round of paranoia driven by possible sellers among larger crypto holders will also translate into heightened trading volumes for the time being.
However, with this much of a drop factored into Ethereum, we think the exchanges will feel a pretty bad ripple effect from this as well.
So what happens to Coinbase?
Figure 2. Coinbase Price Chart
Source: Google
Investors get the picture with Coinbase, and many are fleeing for the exits. It’s kind of obvious that with this much of a drop in asset values, that the reported assets figure will be worse in a very short comparative period of time.
Hence, Coinbase doesn’t present itself as one of the best performing IPO stocks right out the gate, but then again there are other big time unicorns that have already lost a lot of market cap from 52-week highs like AirBnb (BNB), Bumble (BMBL), Palantir (PLNTR) to name a few.
Figure 3. Coinbase Assets on Platform as of March 31st, 2021
Source: Coinbase
Given the price of Bitcoin and Ethereum were $59,491 and $1,932 on March 31st, 2021 (the date when exchange assets were valued) we think the recent rout in Bitcoin and Ethereum translates to a loss on Assets on Platform from when prior-quarter, which will be difficult to ignore when Coinbase reports Q2’21 earnings.
At this point, Bitcoin is priced at $36,371 and Ethereum is priced at $2,304 as of the time of writing. So, if the value of those assets were adjusted than BTC prices alone would affect coinbase assets by -$53.92B. However, Ethereum is still higher than when Coinbase last valued those assets, so if Coinbase had $31B in ETH deposits than that value would have increased by +19.2% despite the -30% drop in Ethereum today, wiping out the gains to a measly $6B or so, assuming there weren’t many client withdrawals in the form of fiat currencies.
That being said, we still think Coinbase’s total asset figure will drop to $150B – $170B or so assuming Ethereum continues to crater, along with the rest of the alts along with Bitcoin. Keep in mind, the continued sell-off in Coinbase is due to the dependency on crypto asset prices. As the recent rout in prices will affect fee based revenue, or platform based revenues as it earns a small percentage against total assets on platform, though there’s likely an uplift in exchange based revenue. However, exchange based fees will shrink as the total crypto market shrinks as well. So, we think trading revenues might surprise on heightened volume, but the reduction in assets might surprise to the negative, which has negative implications long-term. Also, withdrawal trends could worsen the reported Q2’21 assets figures ahead of our estimates. Basically if Bitcoin and Ethereum continue to crash, Coinbase’s business fundamentals go along with it.
Disclosure: Cho Research was not compensated by Coinbase to publish “Coinbase Bombs Lower on Ethereum’s Worst Single Day Drop Since 2017” Though Cho Research does use the research dollars it
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