Coinbase and Robinhood Pin Growth Hopes on Prediction Markets

The growth prospects of Coinbase and Robinhood are increasingly tied to the potential of prediction markets, as investors shift their attention away from a disappointing first quarter for crypto trading and towards future product offerings, notes Cantor Fitzgerald analyst Ramsey El-Assal. El-Assal points out that investors are now viewing quarterly results as backward-looking and are instead focusing on forward-looking demand trends and the product roadmap, which includes newer offerings like prediction markets. Despite expectations of softer first-quarter results due to a decline in crypto prices and trading activity, both companies are seen as having potential for long-term growth driven by new products and services. Bitcoin and ether prices fell by approximately 23% and 29% in the first quarter, impacting trading volumes across exchanges. As a result, Coinbase's trading volumes decreased from $66 billion in January to $54 billion in March. Cantor estimates that Coinbase's consumer and institutional trading volumes will be $35 billion and $167 billion, respectively, both of which are below Wall Street expectations. The firm also projects exchange revenue to be below consensus. Nevertheless, El-Assal has maintained an 'overweight' rating on the stock and raised his price target to $250, citing improving sentiment and long-term growth drivers. Robinhood faces similar near-term challenges, with the analyst expecting a decline in trading volumes due to softer market conditions and a decrease in net interest revenue resulting from lower rates. However, the company's business model provides some cushion, as higher volatility can boost trading margins, and Cantor expects stronger yields in equities and options to partly offset weaker activity. The quality of crypto revenue may come under pressure, with El-Assal noting that the platform's tiered pricing structure earns lower yields on large active traders and higher yields on marginal traders, with the latter group pulling back during periods of volatility. Both stocks have rallied in recent weeks, with Coinbase shares up around 18% quarter-to-date and Robinhood climbing roughly 40% in April from late-March lows, driven by improving risk sentiment and easing geopolitical tensions. The focus is now on future developments, including regulatory changes and new business lines. For Coinbase, investors are watching regulatory developments and new initiatives, including the company's prediction markets offering, which was launched this year and has attracted significant interest, according to El-Assal. Robinhood is also exploring prediction markets, along with other initiatives such as tokenization and private market access. These efforts, combined with regulatory changes, could help drive future growth. Cantor has maintained an 'overweight' rating on Robinhood and raised its price target to $110. The broader view, according to El-Assal, is that while current trading trends remain tied to crypto price cycles, the next phase of growth will depend more on product expansion and new use cases. However, the regulatory environment for prediction markets remains uncertain, with the New York Attorney General's office recently filing a lawsuit against Coinbase and fellow crypto exchange Gemini over their prediction market offerings, alleging that these products are actually gambling products and therefore in violation of state regulations. The question of whether prediction markets constitute gambling products is currently being debated in both state and federal courts, with the Commodity Futures Trading Commission arguing that prediction markets are swaps and should be regulated at the federal level, while states argue that at least sports-related contracts are not swaps and should be licensed and overseen by state regulators. This issue is likely to ultimately be decided by the U.S. Supreme Court.