Notes 2/23: Coinbase Earnings

Cryptocurrency exchange Coinbase’s earnings yesterday reflected the debilitating pain of an unpredictable crypto winter. Perhaps, the most telling statistic in the company’s report is the precipitous decline in the number of assets held on its platform.

Between the fourth quarter of 2021, a time when bitcoin price set a record, and the same period a year later, customers withdrew slightly more than $100 billion worth of cryptocurrencies from the exchange’s platform. That 79 percent decline bled into other sources of cash for the company.

Saved By the Interest Income

Transaction revenue, the most important driver of its profits, crashed by 86% to $322.1 million in the fourth quarter of 2022 from the same period a year ago. Blockchain rewards, or the rewards earned from staking tokens on various blockchains, declined by 39.2 percent to $62.4 million. Revenue from its custody unit, which makes money by storing customer cryptocurrencies, fell by 77% to $11.4 million.

About the only glint of hope in Coinbase’s earnings report came from an increase in its revenues from subscription and services offerings, which rose 34% on a quarterly basis. On an annual basis, its gains were even more impressive at 53%.

But that win was not driven by the company’s business activities but by increased interest income from stablecoin USDC. Seventy nine percent of the $182 million in total revenue derived from interest rates was from USDC’s investments in Treasury securities. Coinbase is a partner in the consortium responsible for managing USDC.  

More Pain Ahead

The short-term outlook for Coinbase’s future earnings does not look too bright.

The company’s two primary sources of revenue – transaction fees and subscription and services revenue – are both under a cloud. Declining liquidity and a ceaseless narrative of scandals has spooked investors, both institutional and retail, and they have fled crypto markets.

Coinbase Chief Financial Officer Alesia Haas pointed to evolving market conditions for crypto and its volatility this past month in a conversation with CNBC yesterday. But volatility has always been part of crypto; there is no guarantee that the recovery in prices that occurred over the past month will sustain over a long period. Besides, there is one more domino to fall in crypto markets, meaning the markets are due another crash in prices.     

A Regulatory Offensive

To make matters worse, authorities have launched a regulatory offensive against cryptocurrencies. While Coinbase has escaped their rapidly spreading dragnet and could, ultimately, benefit from a purge in the crypto ecosystem, the SEC’s actions have had a chilling effect on investor perception of the asset class and its prices.

An example is staking-as-a-service, which is under an existential threat due to the SEC’s action against Kraken. In its earnings statement yesterday, the company stated that it had not violated securities laws. “…Coinbase staking products are not securities, USD Coin (USDC) is not a security.” Haas also clarified that Coinbase’s staking service accounted for less than 3 percent of its overall revenues.  

However, a staking crackdown by regulators is sure to affect prices and yields for various tokens on Coinbase’s platform. In turn, that decline could eat into various line items, from blockchain rewards to transaction revenues, on its income statement.

For the coming quarter, the company has projected a revenue increase of between 14% to 15% to between $300 million to $325 million for its subscriptions and services. The estimates for those percentage increases may be based on rewards accruing to the company after Ethereum’s Merge is complete. But those estimates will go awry if regulatory agencies swing into action.

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