The Bull and Bear Case for Coinbase in 2023

As sentiment in the crypto space has soured for many in recent months amid scandal and bankruptcies, the exact impact that will have on a publicly traded stalwart in the space remains to be seen.

Coinbase, which went public in April 2021, has hit several all-time lows this month and is down roughly 86% on the year. The price of bitcoin has plummeted 65% in 2022.

Some analysts have said while FTX’s bankruptcy is a short-term negative for crypto companies like Coinbase, which currently relies on retail traders, it could benefit the exchange in the long term.

“To the extent [the FTX crash] pushes people away from cryptocurrency in general, it just leads to a smaller market and less revenue for them,” Morningstar Analyst Michael Miller told Blockworks. “That’s really been their big problem.”

The flip side, Miller said, is the cryptocurrency exchange industry is less competitive today than it was six months ago.

“Right now the overall market size does not compensate them for the larger market share,” he said of Coinbase. “But the hope [is] if cryptocurrency does recover, they are in a strong competitive position considering what’s happened.”

Bullish or bearish?

Dan Weiskopf, co-portfolio manager of the Amplify Transformational Data Sharing ETF (BLOK), said Coinbase — with about $5 billion in cash on the books and about $3 billion in low-cost debt — is set to be “a survivor.”

“The question is what it will look like on the other side,” he told Blockworks. “Clearly…its business model has to evolve, and they cannot afford to lose $500 million a quarter.”

Coinbase reported a net loss of $545 million during the third quarter. The company’s transaction revenues of $366 million were down 44% from the prior quarter. Revenue from subscription and services increased 43% quarter over quarter to $211 million, mainly driven by higher-interest income.

BLOK co-portfolio manager Michael Venuto told Blockworks last week that he is keeping his eye on Coinbase in 2023.

“Until there are some signs that the crypto winter is coming to an end, it’s too early for us to allocate more to it,” he said of Coinbase at the time. “There’s potentially more pain even though we know long-term they’re going to benefit.”

Fund manager Ark Invest, though, has been upping its positions in Coinbase amid the latest crypto carnage. Ark Research Director Frank Downing said Coinbase is set to be “a share gainer” in the space over the long term as trust flows to more regulated exchanges.

Exchanges, indeed, have tried to reassure investors following FTX’s crash through various transparency efforts, including proof-of-reserves reporting. Coinbase produces quarterly financial statements, and auditing firm Deloitte certifies that its assets are backed one-to-one.

Read more: What Is Proof of Reserves and Can It Build Back Trust?

Some have argued these companies are falling short in their trust initiatives, and certain auditors have halted activity in the space. Others say FTX’s demise validates the importance of self-custodying cryptoassets.

Coinbase revealed that from Oct. 1, 2021 to Sept. 30, 2022, law enforcement agencies made 12,320 requests for customer account information and financial records — a 66% increase from the prior year.

“A strong case for self-custody,” Sasha Hodder, founder of Hodder Law Firm, tweeted last week, referring to the Coinbase stat.

Last year Coinbase received over 12,000 requests from law enforcement to gather user information for various cases. (That’s ~32/day!)

Almost half of those requests came from the US government.

A strong case for self-custody!

— Sasha Hodder (@sashahodler) December 19, 2022

The company said in a blog last week that it is also focused on “supercharging key building blocks for web3,” such as its self-custody wallet, NFT capabilities and developer tools. The post signals a continued push to be associated with more than just retail trading.

“We’ve made major investments in Coinbase Wallet because there is no web3 without self-custody,” the blog states.

A Coinbase spokesperson declined to comment further.

Looking ahead

Weiskopf said he is anxious to see what comes of Coinbase’s partnership with BlackRock in 2023.

The crypto exchange revealed a partnership in August with the firm — the world’s largest asset manager, with roughly $8 trillion in assets under management.

By connecting BlackRock’s investment platform, Aladdin, and Coinbase Prime, the companies said they would provide crypto trading, custody, prime brokerage and reporting capabilities to clients of both Aladdin and Coinbase.

Many called the deal a significant one. Ark Invest models suggest the relationship could be a catalyst for bitcoin’s price to rise by up to $500,000.

As for diversifying revenue streams, Coinbase said in its third quarter shareholder letter that while it expects pressure on transaction revenue to persist into next year, it seeks to continue growing its subscription and services products — a segment that includes staking and custody.

Coinbase began to support staking for Cardano in March and Solana in June. Mark Palmer, a managing director and fintech analyst at BTIG, previously told Blockworks the exchange is well positioned to be a beneficiary of increased institutional adoption of staking.

The exchange’s push within Web3 services likely won’t materially contribute to the company’s bottom line anytime soon, Miller said.

“As Web3 does grow, there’s opportunity there, but that is really more over the medium or long term,” he added. “For at least the near-term future, it’s going to be pretty tightly tied to cryptocurrency markets.”

Coinbase’s stock price closed the week at $35.49. Miller said his fair value estimate for the company is $90.

“That does include a projection that cryptocurrency markets recover, as that’s going to be the big long-term driver for Coinbase,” he said. “Ultimately if bitcoin goes to zero, that’s the fair value estimate for Coinbase.

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