Crypto giveth, and crypto confuseth the heck out of Wall Street.
In the wake of Coinbase’s earnings report yesterday afternoon, shares of the U.S. crypto exchange are off sharply this morning. What happened? Public-market investors continued to underestimate how volatile the crypto market is, leaving them to over-index on gains and over-despair on less impressive results.
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Coinbase is not alone in giving Wall Street raptures followed by panics. Thanks to falling crypto trading activity, we recently saw a similar miss in Robinhood’s earnings in terms of raw results and sharp resulting declines in its share price.
Notably, both companies made noise before their earnings reports that their crypto incomes would fall in Q3 2021 compared to the second quarter. And yet it appeared that public investors were still surprised when that, in fact, happened.
The speed of the crypto economy as a whole may be simply too quick for public-market investors to fully grok. And the exchanges aren’t even the swingiest of crypto-themed investments. Let’s talk about it.
Up, down, up, down (repeat)
Robinhood saw its trading revenues from crypto fall from $233 million in Q2 2021 to just $51 million in the third quarter. That the company had explicitly told investors that a slowdown was coming does make the declines less painful, although it may be that Wall Street had simply expected a smaller decline.
To reiterate, Robinhood had previously told investors during its IPO process that it expected to post sequential revenue declines in Q3 “as a result of decreased levels of trading activity relative to the record highs in trading activity, particularly in cryptocurrencies, during the three months ended June 30, 2021.”
And yet! Investors were perplexed.
Coinbase is a similar story: In its Q2 earnings letter, the company said that it believed “retail [monthly transacting users] and total Trading Volume [would] be lower in Q3 as compared to Q2.” Correct! And yet the market was shocked.
Per CNBC, the company’s third-quarter revenues of $1.31 billion were miles off its expected top-line result of $1.57 billion. Hence, Coinbase shares dropped around 8% this morning, as of the time of writing.
Robinhood and Coinbase are well capitalized and therefore in fine condition. Lackluster results in Q3 compared to street expectations are more of an investor lesson than corporate lethality. But their warnings, delivered results and ensuing shareholder carnage is illustrative.
Of what? The fact that Wall Street continues to underestimate just how volatile the crypto economy still is, despite its growing age. And that it’s not becoming less so.
Consider OpenSea, the currently leading NFT marketplace. Its trading data indicates that NFTs have gone through several cycles of boom and bust this year alone. DappRadar indicates that OpenSea saw peaks in its trading volume in August and October and sharp declines in the following months. That’s not seasonality; that’s a high-variance lifestyle.
So, if Wall Street cannot get its tiny head wrapped around broader exchanges not posting sequential revenue gains, anticipate the comedy when we have public NFT exchanges reporting things like “Q3 trading volumes declined in the wake of falling NFT prices and investor interest in certain key collections, including Bold Badgers Squad and SolChicks.”
Bake those into your financial projections. I dare you.
None of this is a diss. Coinbase and Robinhood remain interesting businesses in aggregate, and each is more than the sum of its recent trading incomes. What’s even more fun is the inability of Wall Street to properly understand the inherent volatility of the crypto economy actually makes the two companies rather strong — if ironic — proxies for the crypto market as a whole.
More simply, if you want exposure to the crypto world, buying Coinbase shares isn’t too bad a method of doing so. Its revenues are tracking up and down with larger crypto market volume, and thus crypto prices, so it fits. And given that the public market apparently finds crypto results embarrassingly unpredictable, Coinbase stock can spike and drop sharply, giving it a feel of a cryptocurrency itself. Sure, you won’t see Coinbase manage the same sorts of gains as a shitcoin, to use the normal parlance, but for a stock, it sure gets around.
Indeed, Coinbase has not been public very long at all, and yet has a $208.00 to $429.54 per-share historical trading range, according to Yahoo Finance data. That’s very crypto-ish.
So, yes, Coinbase stock is a good stand-in for direct crypto exposure, at least today, thanks to its results and the public market over-interpreting any particular period. As is, perhaps, Robinhood. We wonder how long it will take for Wall Street to recognize that.
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