First Mover Asia: Is DEX Efficiency a Long-Term Threat to Coinbase; Bitcoin Sinks Below $22K

Coinbase’s revenue dwarfs that of the decentralized exchange Uniswap but the two companies are generating roughly the same trading volume; ether plunges.

By Sam Reynolds, James Rubin

All eyes on the great and powerful Fed.

As investors began their countdown toward a 75 basis point interest rate hike that the U.S. central bank is widely expected to announce later this week, they continued to back off riskier assets, pushing bitcoin well below $22,000 for the first time in a week.

The largest cryptocurrency by market capitalization was recently trading at about $21,6000, down nearly 5% for the past 24 hours. Bitcoin began to sink early Monday (UTC time) as investors renewed fretting about the Federal Reserve and other central banks' ability to tame inflation without throwing the economy into a steep recession. Bitcoin has fallen four consecutive days since topping $24,000 last Wednesday and inspiring hopes that it had bottomed out.

Ether, the second-largest crypto by market cap after bitcoin, was recently changing hands under $1,500, off more than 8% during the same period and well off its most recent high above $1,600. Other major altcoins were also swimming in red, with AVAX and MATIC both off over 10% at one point.

"Cryptocurrencies are broadly weaker as investors await [a Federal Open Market Committee] decision that will likely conclude with a 75 basis point rate increase and reaffirm a commitment to fighting inflation," wrote Oanda Senior Analyst Americas Edward Moya in an email, although he added, "Rising geopolitical tensions might provide some underlying support for the dollar, which could drag down risk appetite, which would weigh on cryptos."

Stocks and earnings

Crypto's decline veered somewhat from equity indexes, which traded sideways on Monday. The tech-focused Nasdaq dropped a few fractions of a percentage point but the S&P 500, which has a heavy tech component, declining slightly. The traditional safe-haven investment gold also dropped a few ticks, following its gradual downturn of the past few months.

Aside from monetary policy, investors will also be eyeing earnings from Amazon (AMZN), Alphabet (GOOG) and Facebook parent company Meta Platforms (FB) to gauge the severity and speed of the expected economic contraction. They are hoping the pace will be gradual, an at least somewhat soft landing that would suggest the Fed has made progress taming inflation.

Monday also offered its latest twist on one of the debacles that is likely to haunt the crypto industry for at least the near future with lawyers representing bankrupt crypto lender Voyager Digital calling a proposal by FTX to offer early liquidity to Voyager customers a "low-ball bid dressed up as a white knight rescue" that only benefits FTX. Voyager filed for Chapter 11 bankruptcy protection earlier this month. And troubled cryptocurrency exchange Zipmex said it has received an investment offer from an interested party.

A few up signs

Not all signs pointed downward. As CoinDesk Senior Markets Reporter Omkar Godbole reported, bitcoin's Monday plunge came even as Chicago Board of Options Exchange's volatility index (VIX), a measure known as Wall Street's fear gauge, slipped to 22.41 in early Asian hours, its lowest level since April 21, indicating calm ahead of the Fed decision. Meanwhile, layer 1 blockchain Aptos Labs, which is made up of former employees from Meta, raised $150 million in a Series A funding round that was led by FTX Ventures.

In an interview with CoinDesk TV's "First Mover" program, Eric Chen, co-founder of the decentralized finance (DeFi) exchange Injective Protocol, said that the Fed's likely 75 basis point increase had relieved markets who had been fearful of harsher medicine. "Overall, the market is in a more optimistic spot than it was a week or two ago," he said.

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Do DEXs Have a Brighter Future Than Coinbase?

By Sam Reynolds

In 2021, when Coinbase listed its stock, the exchange described a distant but real threat in the form for registering a stock listing.

Decentralized exchanges (DEX).

Then, DEXs were a minor headache, a problem that could be ignored but not an existential threat. Now, they have evolved into something that’s scraping away an entire customer segment. Let’s consider why.

Declining value

Coinbase is cash-rich, has no exposure to Celsius Network, Three Arrows Capital or Voyager Digital, and still is an appealing stock pick for institutional investors. Granted, its stock's value has declined faster than the price of bitcoin, but there are other reasons for that involving regulatory premiums. These aren’t the problems.

The current bear market means there are natural dark, stormy clouds over Coinbase: The enthusiasm for bitcoin at $21,000 just isn’t what it was at the base of the bull market in early 2021.

But even this isn’t the reason why there’s concern within Coinbase.

Equal volume

Data from Kaiko shows that Uniswap, a decentralized exchange, now has almost equal volume to Coinbase.

Coinbase does $1.2 billion in daily volume versus Uniswap’s $1.14 billion. Kaiko chalks this up to a significant drop in Ethereum network fees and the growing role DEXs play in stablecoin swaps.

In all, Coinbase was able to push $7.8 billion in revenue in 2021. Uniswap generates $534 million. From this, Coinbase has a net margin of 32.8% (which is still higher than Nasdaq’s net margin of 19.25%).

The gap in these numbers may appear huge, but the major issue is efficiency. Coinbase has a headcount of just over 3,700. Uniswap has a headcount of 53.

Although trading volume is getting close to equivalency, the difference in revenue is a product of how the exchanges are structured. DEXs must pay their liquidity providers that enable each trade to happen, from 0.05% for high-volume pairs to between 0.3% and 1% for pairs without the same volume.

Different products

While Uniswap is nipping at one metric of Coinbase’s, these are also two different products. Coinbase’s entire existence is predicated on the ease of onboarding retail investors and enabling them to trade. It does offer some advanced features, but it isn’t aiming to be what Uniswap is.

Likewise, Uniswap isn’t a user-friendly platform and is not aiming to take on Coinbase’s primary market – retail. It's definitely a platform for power users.

But if retail decides to sit out the crypto recovery, and enters the market trepidatiously, Coinbase isn’t going to see its volume and revenue grow. If degens once again double down it will be Uniswap that’s pushing more volume.

So on the surface, some might say the two don’t really compete. But it was Coinbase that wrote this in its S-1 form:

“We compete against a growing number of decentralized and noncustodial platforms and our business may be adversely affected if we fail to compete effectively against them,” the exchange wrote in its S-1. “Such platforms have low startup and entry costs as market entrants often remain unregulated and have minimal operating and regulatory costs.”

This article originally appeared on CoinDesk.

About Injective

Injective is a lightning fast interoperable layer one blockchain optimized for building the premier Web3 finance applications. Injective provides developers with powerful plug-and-play modules for creating unmatched dApps. INJ is the native asset that powers Injective and its rapidly growing ecosystem. Injective is incubated by Binance and is backed by prominent investors such as Jump Crypto, Pantera and Mark Cuban.

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