Coinbase Direct Listing: A Significant Fintech Event

The forthcoming Coinbase direct listing represents a noteworthy event within the fintech sector. This consumer trading platform, specializing in cryptocurrencies, is preparing to transition into a publicly traded company.

This move follows a successful 2020, particularly a robust final quarter for the firm. Initial indications suggest that Coinbase is maintaining its momentum into 2021.

Valuation Challenges

Determining Coinbase's precise worth is proving difficult, although numerous analysts are attempting to estimate its value.

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Comparing Coinbase and Robinhood

Coinbase isn't alone in benefiting from the current crypto market surge. Robinhood, another prominent American consumer fintech company, is also experiencing increased activity related to cryptocurrency trading.

Both companies are witnessing heightened consumer engagement and trading volumes, a pattern historically linked to prolonged periods of Bitcoin price increases.

Revenue Model Differences

A key distinction lies in their revenue models. Coinbase generates revenue through transaction fees, while Robinhood does not charge fees for crypto trading.

In fact, transaction fees constituted the overwhelming majority – 96% – of Coinbase’s total revenue in 2020.

This difference creates a compelling contrast between the two platforms.

Analyzing Trading Volumes and Competitive Landscape

Today, we will examine Coinbase’s recent trading volumes and then compare them to those of Robinhood.

Furthermore, we will revisit Coinbase’s assessment of Robinhood as outlined in its S-1 filing. The central question is whether Robinhood’s crypto offerings pose a potential challenge to Coinbase’s consumer trading volumes.

A detailed analysis will help us understand the dynamics at play.

A Debate Regarding Long-Term Market Dominance

The discussion began with a chart shared by Frank Chaparro of The Block on Twitter, prompting consideration of a key market dynamic.

While replicating the precise chart proved difficult due to access limitations, corroborating data from alternative sources confirms the underlying trend. Services like Nomics and Bitcoinity demonstrate a substantial increase in 2021 Bitcoin trading activity on Coinbase Pro, a division of the broader Coinbase platform.

Chaparro’s observation regarding the data’s implications for Coinbase’s Q1 2021 revenue is valid. However, it’s crucial to recognize that increased cryptocurrency demand is benefiting multiple companies within the sector.

Robinhood, a well-known equities and cryptocurrency trading platform, offers crypto trading with no fees, mirroring its approach to traditional stock trading. The company recently published data illustrating its own growth in cryptocurrency users.

The following excerpt is taken from the chart Robinhood released:

According to Robinhood, it acquired over 2.9 million new cryptocurrency traders during each of the initial two months of 2021. This represents a significant surge in new user acquisition. Furthermore, data indicated that the average size of cryptocurrency purchases also increased in 2021 compared to the previous year, signaling a positive trend.

A greater number of users, coupled with increased trading volume and larger transaction sizes, collectively contribute to substantial growth in Robinhood’s cryptocurrency operations.

Given that Robinhood’s crypto trading is commission-free, while Coinbase relies on trading fees for revenue, it appears the former may potentially diminish some of the advantages enjoyed by the latter. Is this a reasonable assessment?

The potential impact is considerable. Coinbase’s public filings detail its revenue generation methods (emphasis added by TechCrunch):

This information is not new; it explains why Coinbase’s performance aligns with the projections outlined in its S-1 filing. The central question, however, is how long Robinhood’s influence will persist. Could Robinhood challenge Coinbase’s position in 2021 through its zero-fee crypto trading model?

The effect of Robinhood’s fee structure on its competitors in the stock trading arena was swift and comprehensive. As the company expanded its user base by offering commission-free trading, established firms were compelled to follow suit. Revenue from trading fees, previously a significant contributor to the earnings of companies like Charles Schwab, experienced a marked decline. Robinhood demonstrated the viability of a payment for order flow (PFOF) model, altering consumer expectations regarding trading costs.

However, why hasn’t Robinhood had a similar impact on Coinbase? The company preparing for its initial public offering offers an explanation, as detailed in its S-1 filing:

Coinbase believes its technological superiority will be sufficient to justify its fees. This represents its competitive advantage. However, these fees are not insignificant and may be perceived as substantial by some users. This creates an opportunity for Robinhood to gain market share, does it not?

The situation is more nuanced than it initially appears. While Robinhood is achieving record growth in its own cryptocurrency trading volume, Coinbase is not demonstrably struggling. In fact, it may be poised to report record results itself.

It would be noteworthy if the “Robinhood Effect” observed in equities trading does not extend to the cryptocurrency market. Nevertheless, Coinbase and its investors are banking on this outcome. Only time will tell!

(Robinhood, continued data transparency, particularly with increased frequency, would be greatly appreciated. Thank you!)

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