Wells Fargo Managing Director Jeff Cantwell joins Yahoo Finance Live to discuss the crypto winter, Coinbase stock, the impacts of government regulation on crypto, rising competition, user declines, and the outlook for the crypto space.
BRAD SMITH: Welcome back to Yahoo Finance. Amid a bear market and a crypto winter, our next guest says holding on to Coinbase shares may not be wise due to several headwinds moving forward. Let's bring in Wells Fargo Managing Director Jeff Cantwell. Jeff, help us lay out what you're seeing, particularly as we move ahead through this crypto winter and what Coinbase is going to have to navigate.
Sure, thanks so much for having me. I'm happy to go through that. I think it's going to sound very similar to what you saw and have heard elsewhere on the show, which is demand. And so we start with the macro. I don't think that the demand environment is conducive for companies across fintech, but specifically Coinbase, to grow at the same rate they were growing pre-pandemic and during the pandemic.
So we look at mostly consumer spending and what the outlook looks like for consumer spending going forward in the context of the Fed hiking rates. And it just doesn't look like we're going to have a particularly strong environment going forward over the next, call it, 6, 12 months, 18 months. Underneath that, if you look past year, over the past summer, crypto winter was impacting the space, particularly in the aftermath of Celsius and Terra.
So we had a number of sort of data checks that we've been doing on the backend of our side. We saw retail volumes were down by over 60% last quarter. This quarter, not looking too great either. We think there's going to be north of a 50% decline in revenue on the retail side, which is really what Coinbase needs to get the meter going on the profitability piece of its-- its business model. So overall, we're a little less constructive on it, I would say, than, you know, the consensus here.
JULIE HYMAN: Yeah, I would say, that's a big drop in revenue that you're looking for there. One of the things that you point out in your note is the risk of rising competition from other platforms like Binance and FTX. What is it that in the eyes of people who were trading this stuff makes Binance and FTX more attractive than a Coinbase? Like, what are the relative propositions for traders?
JEFF CANTWELL: That's a great question. And I think it's important to know that timing is everything, right, in the industry. And so if we were looking at Coinbase in 2016, 2017, A, it would have a great tailwind behind the company, as it was kind of going through a very positive federal driven environment. But also, underneath that, you'd also have less competition. Coinbase really was innovative at that time. And so it had open runway for growth.
At this point in time, what we're seeing from FTX and from Binance and from others, including Robinhood, where we saw last week, is, there's a number of competitors that have really come into the space. And what that's doing is it's making it harder for Coin to differentiate itself. And that's the piece that we're most focused on right now, particularly given the macro environment.
So I think overall, what you're starting to see is share losses for Coinbase. It lost about 130 basis points of market share over these past two quarters. And so we think that given some of these pricing changes that Binance and FTX and others have been making to get lower cost pricing into the equation for the retail side of the business, that's ultimately going to be pressuring Coinbase and making it harder for them to grow from here.
BRIAN SOZZI: Jeff, is the industry big enough to support three main trading platforms? Or if you're Coinbase, you should be now thinking about, well, should I reach out to Binance? Should I reach out to FTX? Do I need to merge with them?
JEFF CANTWELL: Well, consolidation will always be a part of the industry. I'm not necessarily making that call, where we'll see that type of consolidation. But I think what you will see is as price pressure continues over time, as that part of it increases, you will likely see some consolidation amongst exchanges. And historically, that has been the case. We've looked at other industries. I think equity trading is sort of an important corollary to what we're seeing in crypto trading.
And so what you're seeing over time is pricing pressure from new entrants in the equity trading market. And that has led to consolidation. So I agree with your point. It's something that we'll be keeping track of.
BRAD SMITH: Coinbase also has a part of their business that directly revolves around staking. And so for this period of time, in a crypto winter, what does that change in terms of the calculus around how much their revenues that are coming in from their staking business will actually look like and the people that are willing to-- the number of HODLers, if you will, that are willing to stake their cryptocurrency and what that means in revenue for a company on Coinbase?
JEFF CANTWELL: Well, still a small piece of the business is growing. But it brings the regulatory aspect into the equation. You have to look at the role of regulators in the crypto industry going forward. And so, the SEC has been very aggressive as far as regulation. And what they're focusing on right now is the Howey test. And what they're saying is that if there's some coin where a consumer who's purchasing that coin is benefiting from the work of others, that could potentially be deemed a security.
Now, the balance there, the nuance in that argument is Coinbase and others are, I believe, rightly pointing out that there's more to think about with this industry. This is very dynamic. There's a lot of new business models emerging. And so you don't want to stifle innovation. So that's a very valid point. And we kind take that as, this is an ongoing conversation with the regulators.
But ultimately, from our perspective, staking does seem very similar to a yield product, as we've seen in the financial industry. And therefore, you will likely have further regulation. And from our perspective, that will likely be negative for volumes in the space given-- compared to the previous regime pre-regulation.
BRIAN SOZZI: Wells Fargo analyst Jeff Cantwell with the big call on Coinbase, good to see you. We'll talk to you soon.