Notes 5/5: Coinbase Earnings

It is mostly difficult to make sense of opaque crypto markets and their jargon. Coinbase’s earnings provide a window into their workings. The company, which is a flag bearer for crypto in North America, had a mixed bag of numbers to report for the past quarter.

While its revenue increased on the back of increased bitcoin price volatility and interest income, Coinbase still slashed operational expenses to stanch losses. But this quarter’s earnings numbers are still a reprieve from the previous one, when they bled a red streak from an unending pile of crypto scandals.

A Transaction Revenues and Interest Income Story  

Coinbase posted a 22% growth in revenue from the previous quarter to $736.41 million amid losses of $79 million. The main drivers of its revenue increase were transaction fees and interest income.

The 70% rally in bitcoin price this past quarter pumped up trading fee revenues to $375 million, a jump of 16% from the previous quarter. Retail investors accounted for 94%, or $352.4 million, of the total figure. But their trading volumes of $21 billion at the exchange were dwarfed by those of institutional investors, who had $124 billion worth of volumes.

Interest income was the other big contributor to Coinbase’s revenue. It rose to $240.8 million from $182 million last quarter. Circle stablecoin USDC, which holds Treasury securities that generate interest in its reserves, contributed $199 million to that figure.

The company also continues to cut costs to shed excesses accumulated during the crypto bull run. Its operating expenses plummeted by 24% after restructuring and declining spends in all categories of its operations. Coinbase’s head count in Q1 2023 stood at 3,535, down from 4,510 at the end of the previous quarter.

Not a Bright Future

Predicting the future in crypto is a fraught exercise, considering the ecosystem’s volatility and unregulated status. But Coinbase’s position as a leading exchange means that it has some say in shaping that future. Still, it does not a foresee a bright one for itself this coming quarter.

The exchange has forecast a decrease in its subscription and services revenue, the biggest contributor to its top line, primarily due to a further decline in USDC’s market capitalization. Fewer USDC in circulation and a possible rate hike pause by the Federal Reserve means less interest income for the company.

Coinbase Chief Financial Officer (CFO) Alesia Haas pointed to the exchange’s attempts to diversify its revenue to make a case for its future during yesterday’s earnings call. Given crypto’s nascent markets, it will take time for those channels to make a meaningful contribution to its bottom line. Meanwhile, Coinbase’s immediate revenue sources are hurting.

A Trading Problem

The outlook for trading revenues at Coinbase does not look bright either. Liquidity is at one-year lows and bitcoin price has stalled in the absence of major catalysts. Worsening the situation further is the exchange’s loss of market share to competitors and wrangling over the regulatory status of cryptocurrencies with authorities.  

That last bit is especially important for Coinbase because it derives more than 80 percent from the United States. Recently, it filed a case against the Securities and Exchange Commission (SEC) to force clarity on the subject. But the SEC is an enforcement agency and cannot clarify or establish rules for assets. Legislating the matter will take time and has the potential to bump up trading costs for users.

Besides, rule making could go the other way and end up wiping many tokens – including worthless ones like Dogecoin – out of existence. While such coins have no use, they are a valuable source of revenue for the company. In its latest earnings, Coinbase reported that the “Other Assets” category, a line item that does not include Bitcoin and Ethereum – the top two cryptos by market cap, accounted for 46% of the overall revenue from trading cryptocurrencies.

No More Rewards

The landscape for staking rewards, the second biggest contributor to the company’s revenue, is also under threat. Coinbase is among the biggest staking service on Ethereum’s blockchain and commenced withdrawals almost immediately after the Shapella upgrade on April 12.

However, increased enforcement action by authorities could put the brakes on such services. In recent months, authorities have targeted staking programs and individual tokens, charging them with being unregistered securities offerings. Coinbase itself is not in danger from enforcement by authorities but its top line could be hurt by their actions.

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