Crypto Traders in Short Supply, Affecting Coinbase's Q3 Report

Some concerning news for Coinbase (ticker: COIN) as Mizuho analysts led by Dan Dolev have revised down their revenue estimates for the third quarter. In a research note on Wednesday, they reduced the estimates by 7% to $609 million, while analysts broadly expected sales of $682 million, according to FactSet.

The key driver behind this revision is the lower-than-anticipated trading volume on Coinbase, which is the largest crypto exchange serving U.S. customers. The Mizuho analysts believe that the platform had approximately $72 billion in trading volume from July to September, compared to their previous estimate of $88 billion.

The analysts expressed their expectation that declining trading volumes combined with an anticipated decrease in retail trading will have a significant impact on the third-quarter revenue.

Coinbase has yet to respond to requests for comment. However, its executives have previously emphasized their efforts to diversify their business and reduce dependence on trading activity by expanding into different areas of the crypto ecosystem.

It's worth noting that evaporating trading volumes have been a common issue among crypto-trading platforms throughout 2023, despite the recovery in prices for Bitcoin and other cryptocurrencies. Bitcoin alone has experienced a 66% increase this year, reaching around $27,500.

Coinbase's stock has greatly benefited from this price resurgence, having more than doubled to approximately $72.50 this year.

In light of these developments, the Mizuho analysts have maintained their Underperform rating for Coinbase shares, assigning a price target of $27.

Coinbase Faces Challenges Amidst Regulatory Crackdown on Crypto

One of the major challenges faced by Coinbase is the ongoing regulatory crackdown on the cryptocurrency industry. In June, the Securities and Exchange Commission filed a lawsuit against Coinbase, alleging that the platform was operating as an unregistered securities exchange. Coinbase has vehemently denied these accusations.

However, apart from regulatory issues, Coinbase has also been affected by a decline in interest from retail investors. While token prices have seen an overall increase this year, they have remained stagnant over the past few months. This decrease in market activity can be partly attributed to the withdrawal of crypto-market makers due to regulatory concerns. As a result, retail traders have been experiencing poorer spreads and prices.

Coinbase's Chief Financial Officer, Alesia Haas, highlighted the impact of low volatility on investor behavior. During a conference last month, she stated, "When volatility is low, like we see today, people just sit and hold."

In response to these challenges, Coinbase executives, including Haas, have emphasized their long-term strategy of diversifying revenue streams beyond trading. One such initiative involves growing their staking business, which allows investors to earn a yield by posting their tokens to various blockchains. Additionally, Coinbase has seen increased profits from its partnership on the USDC stablecoin, a digital asset backed by reserves in U.S. Treasuries and other interest-generating assets.

Nevertheless, the short-term fate of Coinbase remains closely tied to the level of retail trader interest, which is currently lacking.