Mastercard’s Crypto Trading Offering Is A Major Competitive Threat To Coinbase

Stock market rallies in the context of an overall bear market are often sharp and cause risky, heavily-shorted stocks to rise regardless of questionable or deteriorating fundamentals. The October 17 relief rally seems to fit this description, and a good example of this price action may be the shares of Coinbase Global, Inc. (NASDAQ: COIN) gaining US$5.58, or about 9%, on unambiguously bad news.

On Monday, Mastercard Incorporated (NYSE: MA) announced it was launching a program to allow financial institutions (commercial and investment banks) to offer crypto trading to their clients. Under its plan, Mastercard will act as a bridge between the crypto trading platform Paxos (a private company) and the banks.

Importantly, Mastercard and Paxos will be responsible for regulatory compliance and security, including verifying transactions and providing anti-money laundering and identity monitoring services. More specifically, Paxos will oversee custody and trading services, and Mastercard will integrate these services into banks’ interfaces.

Financial institutions have cited these compliance and security issues as reasons for not offering crypto trading options to their customers. A number of financial players have in-house teams which trade for its own account, and in some cases, the banks offer this service to institutional investors. However, most financial institutions have not yet offered crypto trading capabilities to their retail investors. Now, it appears they may be able to do so while shifting much of the labor and risk to Mastercard and Paxos.

None of this represents good news for a highly valued crypto exchange like Coinbase. It certainly seems possible a large number of retail investors could choose to trade digital currencies in an account held at a well-known financial institutional with decades of experience in managing customer accounts, versus much younger, less established companies like Coinbase or the private exchange FTX.US.

Remarkably, the stock market bid Coinbase shares up markedly on October 17 despite the virtual certainty that Mastercard’s announcement will bring in many well-known, well-capitalized companies to compete with Coinbase.

Even before factoring in this dramatic boost in the number of competitive threats, Coinbase does not look cheap. Coinbase’s enterprise value is around US$16 billion even though its combined adjusted EBITDA over the first half of 2022 was negative US$131 million, and business trends may be even worse in 3Q 2022 than 2Q 2022. Furthermore, the company faces substantial legal issues, including SEC questions about the company’s business practices and a key arbitration claim brought by a group of clients who had substantial monies stolen from their accounts.

Coinbase Global, Inc. last traded at US$65.45 on the NASDAQ.

Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. 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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