Coinbase: As investors are worried about dependence on transaction fees, here’s what CEO Armstrong has to say about it

Coinbase, one of the world’s largest cryptocurrency exchanges, is about to make its public debut later today on the Nasdaq stock exchange. 

Stage set for today’s debut

Yesterday, Nasdaq set a reference price of $250 per share to provide the crypto business a valuation of $65.3 billion. This is lower than the $350 per share that shares of the company were trading in the private market last month, according to Bloomberg. 

Some market analysts believe that the set price is far too low for a company that will become the first major US-based cryptocurrency business to go public via a direct listing. 

#Coinbase gets reference price of $250 from Nasdaq ahead of Wed's direct listing, which would value comp ~$65bn on diluted basis. Reference price seems ridiculously low as Coinbase shares changed hands at $350/share in early March. So odds are high Coinbase doubles on opening day pic.twitter.com/uTFlU0omwK

— Holger Zschaepitz (@Schuldensuehner) April 13, 2021

Renowned CNBC analyst Jim Cramer already warned retail investors not to expect to buy shares of Coinbase at $300 per share. 

Although the set reference price is only indicative i.e. Coinbase stock price can open higher or lower today, the price may reflect some concerns that investors have about the company’s high dependence on its core business – crypto brokerage. 

Lisa Ellis, an analyst at MoffettNathanson, initiated the coverage on Coinbase yesterday with a “Buy” rating and a price objective of $600.00 per share. Among other things, Ellis also touched upon the company’s dependence on high volatility in the crypto market. 

“We believe it is imperative that Coinbase succeed in diversifying its business into broader crypto technology infrastructure services, and we are closely watching its progress (e.g., the recent acquisition of Bison Trails, a blockchain PaaS company) in doing so,” the analyst said in a memo.

Armstrong: Still not seeing margin compression

High volatility and strong trading activity resulted in an increase of almost 850% in Coinbase Q1 revenues. The company said it made a profit of between $730 million and $800 million vs $32 million a year ago. 

Responding to a question from CNBC’s Andrew Ross Sorkin about the dependence on the crypto transaction fees, Armstrong says.

“We haven’t seen any margin compressions yet, and I actually wouldn’t expect to see it in the short-to-mid term,” due to the fast-changing crypto environment. Hence, there’s no “real risk of commoditization happening yet,” he added.  

“Longer term, yes I do think there could be fee compression just like in any other asset class out there.”

Armstrong adds that Coinbase has already started to invest in different revenue streams as it attempts to lessen its dependence on transaction fees. 

These investments will provide more steady and predictable streams of revenue, while in 5 to 10 years, these investments could yield 50% or more of the total revenue.