The Crypto Unicorn's Weaknesses
This week we will continue our dissection of the crypto unicorn, Coinbase, in our second edition. In particular, we will look at some of the weakness of the company that could lead to future problems.
The main drag on Coinbase’s valuation and business model is the dependence on the cryptocurrency market. The majority of Coinbase’s revenue will be derived from the cryptourrency market, so it may serve Coinbase well to invest more money in a marketing campaign that promotes cryptocurrency adoption. Coinbase can also try to diversify its income streams by accepting advertisement revenue. Coinbase’s valuation has dropped in recent months as its cryptocurrency holdings have lost value. Coinbase’s success or failures will remain dependant on the cryptocurrency markets, which makes it a very risky investment proposition.
A long term difficulty that Coinbase faces is a market shift to lower cost exchanges as consumers become more comfortable trading digital assets and move away from the basic Coinbase model that charges a premium for user-friendliness. Coinbase’s market share also faces threat as more customers may prefer exchanges with more coins, such as Binance, which estimated to net $1B in profits last fiscal year. The movement towards decentralized exchanges such as IDEX may also decrease market share for Coinbase, if they are not able to reach critical mass on their own decentralized exchange. Decentralized exchanges in particular benefit from the network effect. The more users on the exchange, the better liquidity, making prices more competitive. Decentralized exchanges also offers more security and anonymity as users do not need to provide any identifying information to the exchange. Users can also maintain custody of their funds and never need to rely on the exchange to hold custody.
Coinbase also has a concentrated customer base in Canada and the USA as other countries tend to gravitate towards exchanges native to their countries. This could present regulatory challenges if the government decides to change its stance on the cryptocurrency industry. With so much of Coinbase’s success reliant on the tailwinds of a cryptocurrency market upswing, it is difficult to gather conviction for an investment into Coinbase.
Catch you next week as we look at some of the opportunities Coinbase can exploit to continue its rapid growth.