Hello everyone, let's take a look at one of the major cryptocurrency exchanges in this week's Opportunity Express: $Coinbase (COIN.US)$

The stock price of Coinbase is highly correlated with the trend of cryptocurrency, especially Bitcoin. As far as 2024 is concerned, Bitcoin hit a new historical high in March this year, with a price close to $74,000/bit. The company is also popular among investors. In August, due to the worries about economic recession, the cryptocurrency was sold off, and the price of Bitcoin once fell below $50,000, which also caused a clear retreat of Coinbase. A rise in Bitcoin price usually attracts more investors and traders to enter the market, increasing trading volume. Exchanges mainly make profits by charging handling fees, and the increase in trading volume directly improves the company's revenue and profit-making ability. This is also why the company's stock price and cryptocurrency price are highly correlated. It should be noted that Coinbase and Bitcoin are not always in sync. Sometimes there will be a lag. At the beginning of this year and in May, the company's stock price was lagging behind the rise in Bitcoin, but it caught up later.

With new macro data released, the market's concerns about the recession have eased. On August 8th, Bitcoin surged over 11%, reclaiming the $60,000 price level. Coinbase is also expected to usher in a rally.

The company's main business is what? What is the impact of the newly approved cryptocurrency ETF on the original business of the exchange? This article will answer these questions.

Performance gradually stabilized. Coinbase was founded in 2012 and went public on the US stock market in 2021, becoming the world's first publicly traded cryptocurrency exchange. In February 2024, Coinbase's market cap surpassed $Hong Kong Stock Exchange (00388.HK)$. The company's business consists of three parts: transaction income, subscription and service, and other income, of which transaction income accounts for the highest proportion. Transaction income refers to the fees charged according to the transaction amount when users use the company's platform for cryptocurrency transactions; subscription and service business includes stablecoin (such as USDC/USDT pegged to the US dollar) income, cryptocurrency staking income, and custody asset income.

Data source: Futubull. Past performance does not indicate future results. The market is risky and investment needs to be cautious.

After the market on August 1st, Coinbase released second-quarter earnings. 24Q2 revenue was $1.45 billion; adjusted EBITDA was $0.596 billion, achieving six consecutive quarters of positive adjusted EBITDA. Both revenue and profit margins achieved significant growth on a year-on-year basis, but declined on a quarter-on-quarter basis, mainly because cryptocurrency turned from a surge in the first quarter to volatility.

Zacks Investment stated that Coinbase is improving its market share in the US spot and derivative cryptocurrency markets, expanding its product portfolio and expanding its international market. In addition, the growth of the stablecoin market will also drive the company's performance. Coinbase's progress in compliance and customer-tailored product features are helpful in reaching new heights.

It is worth noting that "Wood Sister" Cathie Wood increased her holdings in Coinbase during the market downturn. According to trading documents, multiple ETFs of Ark Fund purchased over 0.09 million shares of Coinbase stock on August 5th, worth $17.8 million. On the following trading day, Wood Sister bought nearly 0.02 million shares, worth $3.9 million. The cost price of the two transactions was about $191, and according to the closing price on August 12th, this transaction is currently slightly profitable. $HKEX(00388.HK)$

The company's business consists of three parts: trade revenue, subscription and service revenue, and other revenue, of which trade revenue has the highest proportion.

Trade revenue refers to the fees charged based on the transaction amount when users use the company's platform for cryptocurrency trading; subscription and service revenue include stablecoin (USDC/USDT, etc.) income tied to the US dollar, cryptocurrency pledge income, and income from custodial assets.

Data source: Futubull. Past performance does not guarantee future results. The market is risky, so invest with caution.

After-hours on August 1, Coinbase released its second quarter earnings. 24Q2 revenue was $1.45 billion; adjusted EBITDA was $0.596 billion, achieving positive adjusted EBITDA for the sixth consecutive quarter.

Both revenue and profit growth achieved significant year-on-year increases, but quarter-on-quarter decline due to cryptocurrency fluctuation after a surge in the first quarter.

According to Zacks Investment, Coinbase is increasing its market share in the US cryptocurrency spot and derivatives market, expanding its product portfolio and expanding international markets. In addition, the growth of the stablecoin market will also drive the company's performance. Coinbase's progress in compliance and customer-tailored product features are also helping it reach new heights.

It is worth noting that Cathie Wood, known as "Wood Sister", bought a large amount of Coinbase during the market downturn. According to trading documents, multiple ETFs managed by Ark Invest purchased over 0.09 million shares of the company's stock on August 5, with a value of $17.8 million. On the following trading day, Wood Sister bought nearly 0.02 million shares, worth $3.9 million. The cost price of the two transactions was about $191. According to the closing price on August 12, this transaction is currently slightly profitable.

Does ETF affect the business?

In terms of trade revenue, retail trading (i.e. individual investors' trading) accounts for the main part. In the second quarter, retail trading revenue was $0.665 billion, accounting for more than 85% of the overall trade revenue and nearly half of the total revenue. It can be said that retail traders support half of Coinbase's business.

In January of this year, the SEC approved a spot bitcoin ETF, which raised concerns in the market about Coinbase. Since investors can obtain cryptocurrencies through various means afterwards, exchanges may lose market share. Some analysts believed that new cryptocurrency investors would invest through ETFs rather than Coinbase and therefore would no longer need the company's services. In addition, the lower fees of new ETFs may force Coinbase to join the price war and lower transaction fees, which may affect the company's performance. However, the market's concerns did not materialize. On the one hand, newly established ETFs also need asset custody services from exchanges. Among the first 11 bitcoin ETFs approved by the SEC, 8 chose to cooperate with Coinbase. In the first quarter of this year, the scale of the company's custody assets increased by 69% QoQ, driven by inflow of ETF funds. On the other hand, the company's transaction fees were not impacted by ETFs. The soaring of cryptocurrencies ignited investors' enthusiasm, and fees seem to no longer be the main consideration. MorningStar noted that although there have been concerns about price competition, considering that Coinbase's fees have always been relatively high compared to peers, there is currently no sign that it is under any pressure. The company's market share is still strong, and pricing has even slightly increased in recent quarters. Price wars may be a long-term risk, but there are no factors pushing pricing down in the short term.

At that time, some analysts believed that new cryptocurrency investors would invest through ETFs rather than Coinbase, and therefore, they would no longer need the company's services. In addition, since new ETFs had lower fees, this may force Coinbase to join the price war and lower transaction fees, which may affect company performance. However, none of these circumstances worried the market. On the one hand, newly established ETFs also need asset custody services from exchanges. Among the first 11 bitcoin ETFs approved by the SEC, 8 chose to cooperate with Coinbase. In Q1 of this year, the company's custody assets increased by 69% QoQ due to inflow of ETF funds. On the other hand, the company's transaction fees were not impacted by ETFs. The soaring of cryptocurrencies ignited investors' enthusiasm, and fees seem to no longer be the main consideration.

However, market concerns did not happen. On the one hand, newly established ETFs also need asset custody services from exchanges. Among the first 11 bitcoin ETFs approved by the SEC, 8 chose to cooperate with Coinbase. In Q1 of this year, the company's custody assets increased by 69% QoQ due to inflow of ETF funds. On the other hand, the company's transaction fees were not impacted by ETFs. The soaring of cryptocurrencies ignited investors' enthusiasm, and fees seem to no longer be the main consideration.

On the one hand, the scale of custody assets for the company increased in Q1 of this year with inflow of ETF funds. On the other hand, the company's transaction fees were not impacted by ETFs. The surge in cryptocurrency price ignited investors' enthusiasm, and fees seem to no longer be the main consideration.

MorningStar noted that although there have been concerns about price competition, considering that Coinbase's fees have always been relatively high compared to peers, there is currently no sign that it is under any pressure. The company's market share is still strong, and pricing has even slightly increased in recent quarters. Price wars may be a long-term risk, but there are no factors pushing pricing down in the short term.

Technical analysis

From the daily chart, on August 5th, under the impact of the recession expectation, Coinbase's stock price once broke through the boundary of MA250 bulls and bears. However, after the market's concerns were alleviated, it quickly rebounded above the boundary line, and the trend did not show any significant weakness.

With the recent correction in stock prices, the market's previous low in May has turned from a potential support level into a resistance level. If the trend rebounds to around $200, some long positions may consider selling for profit, and we can pay attention to whether an effective breakthrough can be achieved at this level.

Data source: Futubull. Data is as of the closing on August 12th, 2024. The case is for illustration purposes only and does not constitute any investment advice or guarantee.

Related risks

• The market is volatile. Although Coinbase's non-trading revenue ratio has increased significantly in recent years, the impact of cryptocurrency price fluctuations on the company's performance has been reduced. However, from the perspective of stock price performance, the company's trend is still highly correlated with cryptocurrency performance. Cryptocurrency's volatility is much higher than that of traditional assets, and the company's concept stocks may also be impacted by extreme events.

• Regulatory risks. In January 2023, Coinbase reached a settlement agreement of $100 million with US regulatory agencies to close allegations that were unfavorable to the company's anti-money laundering measures. $50 million of this was a fine, and the other $50 million will be used to improve the company's compliance system. In addition, the SEC's lawsuit against the company is still ongoing. However, compared to peers such as Binance, the company's impact in the regulatory field is relatively small.

• Technical risks. Cryptocurrency exchanges are often the targets of hack attacks. Technical failures or security vulnerabilities may also cause platform downtime or trading interruptions, thereby affecting company performance.

Risk disclosure: This content does not constitute a research report, is for reference only, and should not be used as a basis for any investment decisions. The information involved in this article is not a comprehensive description of the securities, markets, or developments mentioned. Although the information source is considered reliable, the accuracy or completeness of the above content is not guaranteed. In addition, no guarantee is given for any statements, opinions, or forecasts provided in this article.