(Bloomberg) — It’s been a landmark year for digital assets, but a move into the mainstream is making price swings less wild, diminishing a key attraction for many investors and poised to shake up growth of the biggest revenue source for exchanges such as Coinbase Global Inc.
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Despite posting higher-than-forecast first-quarter revenue and profit, the largest US crypto exchange’s consumer trading volume was $56 billion, compared with a peak of $177 billion in the fourth quarter of 2021 at the height of crypto’s previous bull run. Bitcoin’s trading volume — which feeds Coinbase’s trading-fee revenue — has remained muted since the world’s largest cryptocurrency hit all time-highs in March following the introduction of spot Bitcoin exchange-traded funds.
“Volatility looks much more mature in this cycle than it did in 2021,” said Alesia Haas, Coinbase’s chief financial officer, during JPMorgan’s Annual Global Technology, Media and Communications Conference last week. “Volatility of Bitcoin, volatility of Ethereum start to come, what I call, on the grid.”
Average volatility for digital assets dropped to 57% this year, from about 79% in 2021, according to researcher CCData. Higher volatility tends to attract more speculative traders.
At the May investor conference, Coinbase executives mentioned words like “maturity” and “maturation” seven times — especially when talking about the crypto market.
What’s prompting all the talk of market maturation is the fact that, for Coinbase as well as other exchanges, trading-fee revenue this year is unlikely to match the bull run of 2021.
Other exchanges are also forecasting lower volatility this year, partly as a result of the spot Bitcoin ETF’s creation leading to more orderly inflows and less chaos. Plus, prices of tokens — including Bitcoin — are already high, meaning they simply may not be able to rise as quickly.
“The market is more mature today and is less likely to have wild swings,” said Bobby Zagotta, chief executive officer at Bitstamp USA. “It will still be volatile, and there will still be upward momentum on Bitcoin and crypto prices, but I don’t think it’ll be as explosive up and down as prior cycles.”
Thomas Perfumo, head of strategy at Kraken, echoed that sentiment.“I don’t think we are going to have a lot of repeats that we’ve seen in prior markets in terms of the magnitude of growth,” he said in an interview.
Coinbase’s future is far from grim though. Net income, for instance, is expected to jump about 20 times this year versus 2023, data compiled by Bloomberg show. But its absolute revenue and net income numbers are still expected to trail 2021’s peak.
The company’s outlook will depend on how long the current bull market is sustained. If it stretches into 2025, John Todaro, an analyst with Needham & Co., expects Coinbase to generate more revenue. Coinbase’s ability to hold onto spot market share will also be key as its share dropped to 4.18% in May, from 6.5% at the start of 2023, according to CCData.
Still, Coinbase is now much more diversified, and less dependent on trading fees than it was in 2021. The company already made about a third of its sales in the first quarter from other sources, such as revenue share on USDC stablecoin. It’s also booking revenue from its Base blockchain, which debuted last year. That could be “a $300 million annual revenue opportunity,” Todaro said.
And Coinbase is already the custodian for most US spot Bitcoin ETFs. It’s also listed as a custodian for five spot Ether ETFs that are close to being allowed by US regulators. The Ether ETFs aren’t widely expected to be a meaningful near-term revenue driver. But Owen Lau, an analyst at Oppenheimer & Co., expects they will grow Coinbase’s stature in the industry.
Some, like Lau, even argue that lower volatility makes Coinbase shares more attractive. The stock is up roughly 40% so far this year though its more than 30% below an all-time high reached in late 2021.
Market maturity will benefit Coinbase long-term, “because Coinbase is diversifying away from just trading,” Lau said. “Coinbase revenue could become even more predictable. It means that they could command a higher earnings multiple.”
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