Coinbase’s $100 billion valuation Is Ridiculous, Analyst Says
Over the last two months, Coinbase had experienced a remarkable increase. However, the firm has a little capacity to create the future gain expectations embedded in its incredibly great $100 billion valuation. Coinbase benefits greatly from the present crypto markets as they are very tender and contain little rivalry. But then, the market is bound to mature sooner or later, and as the crypto market grows, there would be a lot of rivals to contend with Coinbase for the profit it makes now. Consequently, the transaction margins of Coinbase should drop drastically.
Coinbase’s High margins would experience a Drastic Inevitable Fall
Coinbase’s rivals are strongly believed to reduce their trading charges to zero in a bid to gain more market share. This scenario, the race to zero, occurred in 2019 with trading expenses of stock. It can occur again in the crypto marketing world. Nasdaq Inc. (NDAQ) and Intercontinental Exchange (ICE, the parent company of the New York Stock Exchange) are two well-established crypto Firms. Coinbase anticipated a whooping sum of $100 billion valuation, which means that its income would be 1.5 multiple of the two firms’ joint income in the crypto trading space. Estimates point out that Coinbase should be valuated to $18.9 billion, an 81% reduction of the anticipated valuation.
A data analytic firm recorded that about 66% of adults in the United States do not have an interest in cryptocurrency; 18% don’t even know about it. Meanwhile, the firm, CivilScience, confirms that even though the number of people acquiring cryptocurrency keeps skyrocketing, the number of U.S. adults involved stays at 9%. This proves Coinbaase’s claims that digital assets can go viral and be appreciated worldwide like the internet, which can cause excessive valuations as the record showed that digital assets markets are not close to mainstream.
The Impending “race to the bottom” scenario
As a cryptocurrency firm in the market forefront, Coinbase charges way too high fees on each trade. It claimed ~0.57% of every exchange as fees which amounted to $1.1 billion in exchange income on $193 billion in trading volume. These exchange fees accounted for its income in 2020. Growth in the cryptocurrency trading space would lead to more rivals going for Coinbase’s current high-profit rate. Consequently, this would cause an inevitable fall in the firm’s competitive level.
For instance, if stock exchange charges are signals for crypto trading charges, it should be anticipated that they would be reduced to almost zero if not zero. Rivals like Gemini, Kraken, Bitstamp, Binance, and others will possibly charge close to zero if not zero exchange fees in a bid to get market share. This might kick start the “race to the bottom” scenario, which occurred once in 2019. For instance, if Coinbase’s income share of exchange volume reduced to 0.01%, the same with traditional stock trades, it’s evaluated 1Q21 exchange income would be $35 billion and not the $1.5 billion calculated.