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Coinbase: unlike bitcoin, there are two sides to volatile volumes

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The fortunes of Coinbase are as volatile as the cryptocurrencies that customers trade on its platform. Third-quarter results came in worse than expected after dealing fervour unexpectedly cooled. The stock fell as much as 10 per cent on Wednesday before clawing back some of that lost ground.

The group has emerged as one of main venues in the US for buying and selling digital tokens such as bitcoin and ethereum. It makes the bulk of its revenue from fees collected every time cryptocurrencies change hands virtually.

That business model has made shares in Coinbase alluring to crypto-curious regulated investors precluded from dabbling directly in the tokens. The group listed publicly in April and now boasts a $71.5bn market worth,

Trading volumes slumped almost a third in the last quarter compared with the prior period to $327bn. The number of “retail monthly transacting users” — who trade at least once a month — was 7.4m, down from 8.8m before.

Coinbase remains highly profitable. It made a net income of $406m on revenues of $1.31bn. But that does not justify its lofty valuation. The stock is trading at 49 times forward earnings, compared to a multiple of 29 times for Nasdaq and 25 times for Intercontinental Exchange. Its valuation is baking in very fast growth. That is far from guaranteed, given the unpredictability of demand for cryptos.

The company promised better fourth-quarter numbers thanks to the rally in bitcoin and other digital assets. Coinbase talked up its plans to launch a marketplace for non-fungible tokens (NFTs) as it looks to cash in on the boom in digital collectibles.

Coinbase is pursuing a strategy based on the unstoppable momentum of the crypto revolution or chasing fads, depending on your viewpoint.

No less than 7,248 cryptocurrencies are being traded at the moment, according to coinmarketcap.com. That points to the relatively low cost of creating tokens rather than their growing utility.

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A less divisive observation is that competition has mushroomed over the past year. Robinhood, PayPal and Squarenow offer crypto trading. That is on top of services from rival exchanges including Binance, Gemini, Bitstamp and Kraken.

Investors can also gain exposure to bitcoin through dedicated ETFs. Custody banks are muscling in on providing crypto services to institutional clients.

All of these factors will weigh on the fees Coinbase will be able to charge. Its business, like bitcoin, is a crowded trade.

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