2023-8-31 12:08 |
Coinbase (Nasdaq:COIN) is acquiring an equity stake in crypto operator Circle Internet Financial. As part of the move, the joint venture between Coinbase and Circle, Centre Consortium, is being shut down.
“Centre will no longer exist as a stand-alone entity and Circle will remain as the issuer of USDC, bringing any Centre governance and operations responsibilities in-house,” Circle CEO Jeremy Allaire and Coinbase CEO Brian Armstrong said in a blog post two weeks ago.
The statement added that with growing regulatory clarity for stablecoins around the world, a separate governance body like Centre is no longer necessary. Circle will take full control over USDC issuance and governance. Previously, Centre Consortium, which was founded by Coinbase and Circle in 2018, had taken charge of issuance, but now Circle will be the only USDC issuer.
The announcement also confirmed that revenue derived from interest earned on the dollar reserves backing USDC tokens will continue to be shared between the two firms, although the split will now be equal.
The two firms added that USDC will be launched across six new blockchains. Coinbase stock rose 3% on the news. The stock had shed 30% over the previous month, although is still up 123% year-to-date.
USDC reserves have been dwindlingThe duo will hope the move can help shore up USDC, which has been seeing significant outflows since March of this year. The stablecoin was caught up in the Silicon Valley Bank collapse, with 8% of the reserves backing USDC tokens held in the now-fallen bank. USDC lost its peg amid the incident, dipping as low as 88 cents on exchanges, although rebounded once the US administration stepped in to guarantee deposits at SVB.
In addition to the banking crisis, the stablecoin has also suffered from the great regulatory crackdown in the US, losing significant ground to European-based rival Tether. Since Coinbase was sued by the SEC, USDC’s market cap is down 40%, equivalent to $17 billion of outflows.
Switching back to Coinbase, the world’s largest publicly-listed exchange will hope that the move to eliminate the joint venture will help it further diversify its revenue stream. The crypto market suffered from an enormous dropoff in volume throughout the bear market last year, with Coinbase’s revenue stream plummeting accordingly.
While crypto prices – and Coinbase’s stock – have bounced back thus far this year, volume, liquidity and interest in the space are still levels below the peak of the bull market. Coinbase went public in April 2021, shortly before the market topped in November of that year, and remains 80% below its day-one price, despite the 122% rally this year.
Diversification of incomeEarlier this month, Coinbase reported second quarter earnings which summed up the challenging environment. Despite crypto prices surging to start the year, the exchange’s revenue declined.
The exchange is working to turn things around, highlighted by two rounds of layoffs in the last year. Earnings also revealed its operating expenses have halved from a year ago. With regard to the announcement this week regarding UDCS, however, it feels pertinent to note that for the first time, Coinbase’s share of nontrading revenue was greater than trading venue.
51% of total revenue came via subscriptions and services (equal to $335 million). Of this, a key component is interest income – with T-bills paying north of 5%, it is easy to see how large stablecoins have become so lucrative. This was demonstrated by the staggering $850 million profit that Tether made in the second quarter, driven by its $72.5 billion stash of T-bills.
This diversification of income is vital for Coinbase. Trading volumes have been highly volatile and, as mentioned earlier, freefallen over the last two years. Looking at volumes across all centralised exchanges, we are now seeing levels last seen in 2020.
Coinbase was only founded in 2012, riding the positive side of Bitcoin’s rampant volatility, the company exploding in line with Bitcoin’s popularity. When it went public in April 2021, it was valued at close to $100 billion.
Since then, however, it has experienced the dark side of Bitcoin’s volatility – the cratering price has pulled down trading volume and taken COIN stock with it. Hence the desire to try to diversify as best as it can, although it is also important to note that stablecoin reserves will be intrinsically tied to the health of the overall crypto system and, by extension, the Bitcoin price, too.
Plotting the Coinbase share price against Bitcoin since the former floated publicly demonstrates how dependent the exchange is on the sensitive price of the world’s biggest cryptocurrency – and how it has underperformed it, too.
Adding in the Nasdaq as another benchmark further paints the gruesome nature of Coinbase’s performance:
What next for Coinbase?The struggle for Coinbase has been immense since it went public. And while the above diversification is a prudent move, the reality is that this is an asset that will always be tied at the hip with Bitcoin.
On the USDC side, it has lost major ground to its biggest rival, Tether, which recently hit an all-time high of $84 billion, and owns a dominant two-thirds share of the stablecoin market. Hit “play timeline” on the below chart to see how the market cap of USDC has moved relative to USDT – the latter has seen a 26% jump in market share despite the overall stablecoin market cap dipping 18%.
Hence, the challenges here are many. Yet the partnership between Coinbase and Circle is one that makes sense from both sides. Coinbase, despite its issues, remains one of the larger exchanges. Especially considering the ongoing trouble around Binance, its place as a vital – and trustworthy- fiat on-ramp is one that can be exploited to kick up the usage of USDC.
Having said that, regulation is a key factor here. Coinbase was sued by the SEC in June, and while opinions are divided on what the outcome may be, there is no denying the layer of uncertainty it adds, and how seismic a negative outcome could be for its business.It should be said, however, that recent positive rulings for Ripple and Grayscale in their respective cases do bode well for the industry overall.
Despite the uptick in regulatory-related hope since a few months ago, Tether maintains the advantage of being based in Europe and hence circumvents a lot of the potential securities concerns floating around USDC and Coinbase. Meanwhile, EDX Markets announced its launch, a new crypto exchange backed by names such as Fidelity, Schwab and Citadel Securities. Coinbase’s first-mover advantage is formidable in the US, but it could be about to become a less lonely place.
As for the slew of spot ETF applications recently launched? This could push capital further into crypto and hence become a boon for Coinbase, but it also adds another avenue for investors to gain exposure to Bitcoin without opening up a Coinbase account. Sure, it feels like ETFs would be nothing but a net positive for the entire space, but it is worth bearing in mind as a caveat.
All in all, the news around the new structure behind USDC reads like a sensible move. However, Coinbase is fighting a battle on many fronts, and uncertainty here is high (even for crypto terms!). The stock had been on fire thus far this year, and even after a pullback, is still up 123%. It may one day get back to the lofty days of the pandemic, trading close to a $100 billion valuation, but there are daunting obstacles ahead.
The post What next for Coinbase? USDC seen as diversifier amid uncertain market appeared first on Invezz.
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