Specialist
Former Director at Payward Ltd (Kraken)
Agenda
- Operating environment for cryptocurrency exchanges, focusing on retail investors
- Competitive dynamics between major players such as Coinbase, Kraken, Gemini, Binance, Bitstamp, Okcoin, Bakkt and others
- Fee structures, pricing dynamics and potential market consolidation
- H2 2021 outlook, including regulatory environment and potential winners and losers
Questions
1.
Could you provide an overview of the operating environment for cryptocurrency exchanges, including two or three key trends or drivers that investors should monitor?
2.
You mentioned there seems to be a pretty positive formation of policy-makers. SEC [Securities and Exchange Commission] Chairman Gary Gensler is quite positive on crypto and blockchain. How might any upcoming regulation positively or negatively affect the exchanges?
3.
Could you outline the key differences between Coinbase, Kraken, Gemini, Binance and others? How do you think about the cryptocurrency exchange competitive landscape?
4.
You characterised Kraken, Gemini and Bitstamp as tier 2 players and presumably that’s a measure of volumes. What do you think they could do to compete in the same category as tier 1s such as Coinbase?
5.
Coinbase has a robust product offering. Do you think there would be a head-to-head technology parity if Kraken, Gemini and Bitstamp improved their offerings or would Coinbase just continue to innovate? Could these tier 2s ever compete with Coinbase?
6.
Who do you think of as legitimate threats to Coinbase’s dominant market share? I would outline the potential for more traditional players to enter the market, such as Robinhood and players with more traditional, non-crypto-focused customers.
7.
How do you think about the potential threat to Coinbase or Kraken from the growth of futures markets for cryptocurrencies such as bitcoin? This can be a way for investors to gain exposure to Bitcoin without having to go through those platforms.
8.
Do you think the Asian exchanges are where the threat is, in the sense that they have a different regulatory environment or just benefit from the scale of cryptocurrency interest in the region?
9.
How might Binance potentially running into trouble with the IRS or US Justice Department impact the industry? Perhaps the institutions that trade with Binance would be more incentivised to use more US-based exchanges.
10.
How do these exchanges monitor funds used on their platform to make sure they aren’t used for money laundering? Do they work with regulators to ensure compliance?
11.
What do you think about the comparison between Chainalysis and Elliptic? I understand that Chainalysis is 5-10x times bigger than Elliptic, though that might be a little outdated.
12.
What market share shifts have you noticed or are you expecting within the tier 2 and 3 cryptocurrency exchanges?
13.
Could there be consolidation among some of the smaller exchanges to try and make a push for scale to compete with Coinbase?
14.
Aside from fees, what drive customers to leave Coinbase and go to an exchange such as Kraken or Gemini?
15.
Did it happen frequently while you were at Kraken that a significant number of customers left Coinbase because of margin trading and consumer services? It seems to be one of the platform’s biggest negatives.
16.
What are your thoughts on Paxos? It positions itself pretty interestingly with fintechs and with its stablecoin ecosystem. Could the company be a potential threat to Coinbase? The companies are partners in one degree, but Paxos could be taking away from some of Coinbase’s ancillary businesses.
17.
What are your thoughts on Bakkt, who I understand is switching to a rewards or points exchange? What about Block.one’s Bullish Global exchange, which recently raised USD 10bn from Peter Thiel and Mike Novogratz? Could these exchanges impact the market and Coinbase specifically?
18.
How do DeFi [decentralised finance] exchanges work and how might they potentially threaten cryptocurrency exchanges? I know Coinbase is really interested in being a part of that and converging DeFi and CeFi [centralised finance].
19.
Could you estimate a growth rate for the DeFi market in the coming years?
20.
You mentioned the ease of use and the complexity of understanding DeFi. I think there’s a big regulatory hurdle there. Do you think this is something institutions will be drawn to?
21.
What exchange do you think is best-positioned for the longer term, given new technologies such as DeFi and NFTs [non-fungible tokens]?
22.
How do you think exchanges can diversify away from their revenues being so tied to bitcoin prices, given the volatility there? I imagine it has to do with adding other assets. Who do you think is executing that diversification strategy best?
23.
Which common or niche products tend to be less tied to bitcoin prices? Which products might be more insulated if the crypto crash continues?
24.
Volatility could be good for all the exchanges in the sense that they get the trading fees. How do you think about that as a short-term revenue driver as the prices fall and there’s a lot of volatility in the market?
25.
What’s your outlook for trading fees across some of the key exchanges? There’s been some downward pressure, but to what extent could fees fall in the near, mid- or long term?
26.
Robinhood presumably wants to add in more assets long term that would presumably bring in some of the market. Some of these players aren’t focused on making a profit from crypto, more on just obtaining customers for their core product. In the public equities markets fees were essentially a race to zero and then Robinhood came in with payment for order flow, which made that zero commission the standard. Do you think commissions could go towards zero in cryptocurrency once the public better understand the complexity component?
27.
Could you suggest the mid-term strategies of Coinbase and other players to mitigate the impact of fees dropping?
28.
What are the challenges to moving customers into a subscription-type revenue structure? You mentioned custody and staking. Presumably, many users aren’t particularly crypto savvy and probably leave a lot of their holdings on the exchange, in their wallet. Are you confident they could be moved, considering the demographics that use these kinds of platforms?
29.
To what extent do you think smart order routing is impacting the industry? Voyager is getting pretty popular and it is commission-free. How might that impact fee pricing and the disparity between asset prices across exchanges in the long term?
30.
Do you think Coinbase has a compelling enough offering that it can hold a pricing premium for longer? Do you think customers would still choose Coinbase even if a competitor undercut pricing by a couple of basis points?
31.
What are the other levers that could be pulled to increase customer acquisition? How do CACs [customer acquisition costs] differ across exchanges?
32.
What are the margins typically like for the non-trading business lines? Is that threatened as competition floods into the market?
33.
What are the key headwinds and tailwinds for Coinbase?
34.
What are two or three key questions that you would ask management as an investor to get a good assessment of Coinbase and the broader ecosystem?
35.
What’s your best- and worst-case scenario for the cryptocurrency exchange market and Coinbase specifically? What’s your personal expectation for what’s to come?
