Trading volume on Coinbase plunged roughly 75% in the hours following FTX’s bankruptcy announcement early Friday, according to data from Nomics, a sign the company is beginning to feel the pain from crypto investors shrinking from the increasingly volatile cryptocurrency market.
FTX’s Chapter 11 filing is the latest in a wave of high-profile exchange bankruptcies that have sent the crypto industry into freefall and prompted investors to reevaluate whether to trade cryptocurrencies at all, said Dan Dolev, a senior analyst at Mizuho.
"For many investors, if you didn't read the writing on the wall for the last two events in this industry, it's basically that there's no bottom… this is [ investors'] last and final wake up call,” said Dolev.
It’s a reckoning that could hurt Coinbase’s bottom line.
Coinbase, the largest cryptocurrency exchange in the U.S. by trading volume, reaps 90% of its revenue from the sizable transaction fees it charges its user base of mostly newer investors who don’t trade frequently, a revenue model that requires the company to continually replenish its user base.
But as FTX’s implosion batters investor confidence in the digital asset industry, onboarding new users may prove a difficult task. That’s a challenge the exchange will have to overcome to take advantage of its increasingly narrow field of competitors, one of the few silver linings of the bear-market crypto shakeout.
A different kind of exchange
Coinbase has cultivated a reputation as a safer alternative to fast-and-loose Binance and FTX, a reputation by its going public in 2017.
It’s a point of comparison the company has harped on as it reassures investors that it remains largely insulated from FTX’s implosion.
“I think it's important to reinforce what differentiates Coinbase in a moment like this,” wrote Coinbase CEO Brian Armstrong in a Tuesday Twitter thread. “Coinbase has always strived to be the most trusted player in the space, and we don't engage in this type of risky activity.”
But the company’s decision to market itself primarily towards new traders and the crypto-curious may hamper its ability to grow as the market meltdown spooks less experienced traders and short-term crypto holders, says Lisa Ellis, Senior Equity Analyst at MoffettNathanson LLC.
“When prices are low and you're in a crypto winter, a lot of those retail investors kind of go into hibernation,” said Ellis.
Many new traders flocked to platforms like Coinbase during the pandemic, when inflation was low and government spending was high. At that time, investors’ rush to embrace digital assets catapulted crypto token prices to new highs too. In November 2021, bitcoin’s price peaked at just over $69,000.
But the ongoing crypto winter and then FTX’s implosion earlier this week has sent prices spiraling, meaning many Coinbase users will be less likely to trade. On Wednesday, following news that Binance had pulled out its deal to rescue FTX, bitcoin dipped below $16,000 for the first time in two years.
But there is a silver lining, according to Chris Brendler, an analyst at D.A. Davidson Company. Coinbase’s status as a public company may help the firm win over some new customers as FTX users who were blindsided by that firm’s sudden collapse come to embrace Coinbase, which is legally required to submit itself to rigorous audits and publish reports on its financial health.
“I would not be surprised if Coinbase picks up market share here,” said Brendler.
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