Coinbase: Binance.US Eliminates Bitcoin Trading Fees Further Pressures Business Model

Remarkably, the bad news continues unabated for Coinbase Global, Inc. (NASDAQ: COIN). Aside from unrelenting weakness in digital currencies, Coinbase must now contend with at least one rival which seems to be unconcerned with near-term economics.

On June 22, the well-known and formidable cryptocurrency exchange Binance.US, announced it will offer zero-fee Bitcoin trading on its platform in a bid to gain more users. By comparison, Coinbase charges a flat 1% fee on all cryptocurrency transactions. Cayman Islands-based Binance is the world’s largest crypto exchange by volume, although not all of its features are available to U.S. residents. An April 2022 US$200 million seed funding round valued the private company at US$4.5 billion.

Quite logically, investors aggressively sold Coinbase stock on June 22; it finished the day down US$5.58, or nearly 10%. Unfortunately, Binance.US’s action will probably force Coinbase at least to cut, if not eliminate, its transaction fees which could in turn weaken its already deteriorating financial results, and further pressure Coinbase shares.   

There are several counterintuitive aspects of Binance.US’s move. For example, unlike Robinhood Markets, Inc. (NASDAQ: HOOD), which offers commission-free crypto trades but earns fees by receiving rebates from routing traders’ order to different exchanges, Binance plans to earn no money on the no-fee transactions it now offers. (Robinhood’s cryptocurrency strategy is similar to its contentious payment for order flow methodology it employs in its no-fee stock trading model.) 

Another potential head-scratching decision by Binance: the company hopes to boost its staff dramatically now despite the extraordinarily weak price action in all digital currencies. The company currently has hiring plans for 2,000 “engineers, product, marketing to business development” personnel. 

Perhaps the actions of Binance.US would be more understandable if commission-free stock trading platforms like Robinhood were flourishing in the present environment. Of course, the opposite of that scenario is prevailing. Both Robinhood’s operating results and stock price performance have disappointed investors for months.

Coinbase’s operating cash flow flipped dramatically to negative US$830 million in 1Q 2022 from positive $3.0 billion in 4Q 2021, as its adjusted EBITDA was merely US$20 million in the quarter, down from US$4.1 billion in the full year 2021. (Coinbase’s lowest quarterly adjusted EBITDA in 2021 came in 3Q 2021 when it recorded positive US$618 million.) In turn, the company’s cash balance fell to US$6.1 billion at March 31, 2022 from US$7.1 billion as of December 31, 2021.

(in millions of US dollars, except otherwise noted)2022E1Q 2022Full Year 20214Q 20213Q 2021
Monthly Transacting Users, or MTUs (millions)5 to 159.28.411.47.4
Retail Trading Volume$74,000$535,000$177,000$93,000
Institutional Trading  Volume$235,000$1,136,000$371,000$234,000
Trading Volume $309,000$1,671,000$547,000$327,000
Retail Assets on Platform$123,000$141,000$141,000$116,000
Institutional Assets on Platform$134,000$137,000$137,000$139,000
          Total Assets on Platform$256,000$278,000$278,000$255,000
Total Market Capitalization of All Crypto Assets $2,321,000$2,321,000$2,090,000
     % on Coinbase Platform 11.5%11.5%12.2%
Transaction Revenue$1,013$6,837$2,277$1,090
Subscription/Services Revenue$152$518$213$145
Net Revenue$1,165$7,355$2,490$1,235
Transaction Expenses as % of Net RevenueLow 20% range24%17%20%16%
Sales & Marketing Expenses as % of Net Revenue12% to 15%17%9%10%9%
Technology and Development Plus G&A Expenses$4,750$984$2,201$757$599
Adjusted EBITDA$20 $4,090$1,205 $618 
Operating Cash Flow($830)$10,730$2,993 $342 
Net  Income($430)$3,624$840 $406 
Cash, Including Digital Assets$6,116 $7,123 $7,123 $6,353 
Debt – Period End$3,486 $3,491 $3,491 $3,496 
Shares Outstanding (millions)261.9261.9261.9261.9

Coinbase stock has been exceedingly weak, dropping 85% in almost a straight line since November 2021. The actions the company may be forced to take to counter a major competitive threat by a well-financed rival could prompt even more selling. Moreover, setting aside the potential implications of Binance.US’s move, Coinbase stock does not look cheap based on fundamentals, and its cash burn seems likely to accelerate in 2Q 2022.

Coinbase Global, Inc. last traded at US$62.71 on the NASDAQ.

Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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