Compass Point Reiterates Sell on Coinbase Amid Derivatives Competition
In brief
- Compass Point maintained Sell rating and $140 price target for Coinbase (COIN).
- Low switching costs and competition constrain Coinbase's derivatives pricing power versus spot trading.
- Kraken, Robinhood, Kalshi, and CME expand perpetual futures offerings, fragmenting the market.
- U.S. leverage restrictions and offshore venue approval pose longer-term regulatory headwinds.
- Coinbase's $2.9B Deribit acquisition faces margin pressure as derivatives revenue growth stalls.
Derivatives Competition Intensifies
Coinbase generated $50 million in first-quarter perpetual futures revenue as retail trading revenue fell to its lowest point since the third quarter of 2024. The weakness underscores the challenge facing the exchange even as it pushes deeper into derivatives. Coinbase acquired Deribit for $2.9 billion last year to expand its derivatives footprint, but Compass Point analysts argue the investment faces structural headwinds.
The core issue: "Competition and low switching costs limit COIN's ability to exert pricing power relative to spot trading, particularly among more sophisticated users that are most likely to trade these products," Compass Point analysts said in their note.
Market Share Fragmentation Accelerates
New entrants are fragmenting the landscape. Kraken and Robinhood announced that perpetual futures are rolling out soon. Interactive Brokers integrated Kalshi's prediction market alongside crypto exchange Bullish, while the CFTC approved Kalshi to offer perpetual futures tied to Bitcoin. The CME signaled that Bitcoin futures and options trading would occur around the clock through its venue.
Coinbase did secure a regulatory win. The CFTC granted Coinbase regulatory relief to provide U.S. users access to offshore crypto perpetual futures through its subsidiary Deribit. Yet Compass Point views this expansion as a net negative.
Regulatory Risks Mount
Analysts identified several longer-term headwinds. Compass Point analysts view U.S. regulatory expansion as a negative driver for Coinbase's market share and pricing power longer-term. Compass Point analysts identified the CFTC's potential approval of Americans trading on Hyperliquid or offshore venues like Binance as growing risks.
Compass Point analysts expect leverage restrictions to limit U.S. perpetual futures trading relative to offshore markets. The researchers also noted that Compass Point analysts posited that the Trump family's connection with Binance through World Liberty Financial's USD1 stablecoin could improve the likelihood of U.S. access to Binance.
Bottom line: Coinbase's efforts in derivatives will generate limited revenue growth amid depressed market conditions and competitors eyeing increased market share, according to the firm's analysis.
