As the crypto industry continues to evolve, one analyst is reassessing his initial doubts about Coinbase. Patrick O'Shaughnessy, an analyst at Raymond James, has acknowledged the significant changes in the crypto landscape since Coinbase's mid-2021 IPO. Despite this recognition, he continues to maintain his Underperform rating on the stock.
At the heart of Raymond James' original thesis was the expectation that Coinbase would experience pricing compression over time due to increased competition. However, recent data indicates that Coinbase's average retail take rate has actually increased from 1.2% to 1.3% in June 2021 to 2.5% in the most recent quarter.
This unexpected shift in pricing can be attributed to a positive change in Coinbase's customer base. While many traders have withdrawn from the crypto market amidst the 2022 bear market, Coinbase has managed to retain its retail customers who are willing to pay higher fees. Despite facing competition from brokers like Robinhood Markets, several rivals within the crypto industry have fallen, including FTX.
O'Shaughnessy speculates that this favorable competitive environment has allowed Coinbase to raise its pricing on the retail platform instead of resorting to price reductions in order to maintain market share.
It's important to note that the crypto industry is highly dynamic and subject to constant changes. As such, analysts like O'Shaughnessy must regularly reassess their perspectives and adapt to new developments. Although unexpected, Coinbase's ability to increase retail pricing demonstrates its resilience in a challenging market environment.
By leveraging its strong customer base and adapting to shifting industry dynamics, Coinbase has defied initial expectations and emerged as a potential leader in the crypto brokerage space. As investors continue to monitor the evolving landscape, it will be interesting to see how Coinbase navigates future challenges and capitalizes on emerging opportunities.
Another thing Raymond James says it got wrong—at least so far—was the risk that the stablecoin Tether—the most dominant dollar-pegged token—posed to the crypto ecosystem. Given the systemic role of stablecoins in the digital asset economy and Tether’s mixed record of transparency, there was a concern that a failure at Tether could damage the whole space.
Despite concerns over asset backing, Tether has remained largely resilient over the past few years, according to O’Shaughnessy.
Raymond James wasn’t bearish on everything in 2021—in fact, they were positive about the broker’s opportunities in subscriptions and services. Coinbase has experienced tailwinds in this business, but from an unexpected place: Holdings of the dollar-pegged USDC stablecoin has seen interest income surge in step with rising interest rates.
The success of Coinbase’s interest income line has offset a lot of the pressures the firm has seen in other areas of its business such as lower transaction volumes, states O’Shaughnessy. That makes Coinbase “look more like a bank,” with 30% of its revenue generated from interest income, he added.
But Raymond James wasn’t all wrong on all aspects of its bearish stance and continues to double down on it. O’Shaughnessy still views the regulatory backdrop as unfavorable for Coinbase. That backdrop has shifted from patchwork guidance in 2021 to more aggressive enforcement actions against crypto firms from the Securities and Exchange Commission—which targeted Coinbase this year—and other agencies.
The Future of Coinbase Hangs in the Balance
The Securities and Exchange Commission (SEC) is intensifying its crackdown on potential securities violations in the cryptocurrency industry. This has put Coinbase, one of the leading cryptocurrency exchanges, in a precarious position. The SEC alleges that Coinbase is operating as an unregistered securities exchange. However, Coinbase vehemently denies these allegations and is determined to fight them in court. Despite this ongoing legal battle, Coinbase has managed to establish itself as a resilient player in the volatile crypto market, earning a reputation as a top-tier investment opportunity. This has undoubtedly contributed to its remarkable surge in stock price throughout 2023.
However, there are valid reasons to consider selling Coinbase stock, particularly at its current sky-high valuation. One such reason is the philosophical pessimism shared by Raymond James. They contend that the ultimate utility of cryptocurrencies remains largely elusive, posing a potential obstacle to Coinbase's long-term success.
"While countless individuals have dedicated their efforts over the past 15 years, we still struggle to identify truly meaningful use cases for cryptocurrencies and blockchain technology," stated O'Shaughnessy.
Nonetheless, investors who have reaped significant profits from Coinbase's performance this year likely remain unfazed by these concerns.