https://nomics.substack.com/p/narrative-analysis-coinbase-global
Company: Coinbase Global, Inc. (NASDAQ: COIN)
Sector: Financial Services
Industry: Financial Data & Stock Exchanges
Founded: 2012
IPO: 2021
HQ: San Francisco, CA
Coinbase is a widely-used cryptocurrency exchange platform established in 2012, enabling users to buy, sell, and store various digital currencies, such as Bitcoin and Ethereum. Renowned for its user-friendly interface, Coinbase facilitates crypto transactions with traditional fiat currencies, linking to users' bank accounts or credit/debit cards. The platform offers additional services, including “Advanced Trade” for professional trading, secure wallet storage, and educational resources, contributing to its reputation as a secure and accessible gateway for individuals and institutional investors to engage with the cryptocurrency market.
At the forefront of Coinbase's trajectory are its co-founders, with Brian Armstrong spearheading the vision and direction, while fellow co-founder Fred Ehrsam contributes his insights as a member of the board of directors. Armstrong, orchestrating Coinbase's journey, has strategically assembled an executive team brimming with talent hailing from LinkedIn, Lyft, Google, Citadel, the U.S. Government, and Meta. This diverse blend of expertise signifies Coinbase's dedication to excellence and innovation.
The leadership ensemble is further enriched by the Board of Directors, which reads like a who's who in the tech industry, featuring luminaries such as Marc Andreessen, a partner at Andreessen Horowitz, and Tobi Lutke, the visionary founder and CEO of Shopify. In this dynamic realm of cryptocurrency, Coinbase's leadership mosaic, fortified by a track record of success, is poised for ongoing brilliance and growth.
Crypto As An Asset Class: As a comprehensive crypto service provider, Coinbase offers a range of products enabling customers, both institutional and individual, to engage in diverse cryptocurrency markets, including derivatives and international options, fostering accessibility and flexibility in managing their digital assets.
Crypto Updating The Financial System: Coinbase offers a variety of products designed to enhance the financial landscape. Ranging from USDC, a stablecoin pegged to the U.S. Dollar, to the Coinbase Card — a Visa debit card enabling users to earn crypto rewards on transactions — these initiatives aim to transform the existing financial infrastructure.
Crypto Powering The Future Of The Internet: Coinbase is actively advancing Web3 and the broader crypto ecosystem through innovative products. The Coinbase Wallet, accommodating numerous cryptocurrencies, Base, an Ethereum Layer 2 solution with the goal of onboarding thousands to decentralized applications (dApps), and an NFT marketplace, underscore their commitment to pushing boundaries. As they aspire to become a central player in the future of the internet, Coinbase is dedicated to fostering the growth of crypto.
Compound Annual Growth Rate (CAGR): 11.8%
Market Concentration: Medium
Fastest Growing Market: North America
Largest Market(s): EMEA & APAC
Domestic Presence:
Estimated 52M Americans own crypto
9% of those surveyed (by Coinbase) say they are satisfied with the current US financial system — shining a light on the publics call to update the system, of which cryptocurrencies and blockchains are poised to do so
22% of those surveyed (by Coinbase) say they think the current US financial system is better than that of any other country — garnering immense room for improvement
International Presence:
Estimated 425M own crypto globally
83% of G20 Nations have adopted crypto regulations
Bitcoin is legal tender in El Salvador and the Central African Republic
Of the top 5 exchanges highlighted above, only 2 are based in the United States, with Coinbase being the sole publicly traded entity.
Notably, Coinbase faces SEC legal action, accused of running an unregistered securities exchange. However, they are not alone as the SEC has recently targeted Kraken and Binance as well, with Binance's CEO stepping down amid a $4 billion lawsuit.
It's essential to note that these exchanges are native to the crypto space and does the graphic does not include traditional finance (TradFi) players like Fidelity and BlackRock. These incumbents are entering the crypto arena by launching ETFs focused on Bitcoin and Ether, aiming to secure a slice of the crypto revenue. Among the introduction of TradFi crypto products (e.g., ETFs) are derivatives, 401k purchases, and more, slowly allowing institutions to pour cash into these crypto products to diversify their portfolios, and thus increasing the desire for and prices of various cryptocurrencies.
Coinbase has been around in the crypto-sphere longer than most, having been created when most “cryptopians,” were trading Bitcoin on the infamous Mt. Gox exchange. Aside from a select few, Coinbase was really the first American/Western entrant that was somewhat regulated shortly after their inception – and is now considered to be the most regulated and most compliant being listed as a public company. Coinbase has and continues to stick to their thesis of abiding by government frameworks (and requesting clarity in areas of clouded regulation) in order to remain compliant and exude their aurora as the most trustworthy and by-the-book crypto exchange available.
Coinbase’s revenue streams can be broken down into two main buckets:
Transaction Revenue – The trading fees earned through Coinbase exchange
Subscription and Services Revenue – Everything else, such as:
Stablecoin Revenue
Blockchain Rewards
Interest Revenue
Custodial Revenue
Other
Transaction Revenue typically follows the volatility of the crypto cycle – when in a crypto bull-market trading volumes usually increase resulting in an increase of transaction revenue. During times when markets are in favor of crypto, the transaction revenue can be limitless, yet when sentiment shifts away from crypto, transaction revenues typically begin a steep decline. This volatility made earnings predictions much harder to predict – something Wall Street does not like – as the revenue that Coinbase could generate varied greatly and was highly reliant on the crypto market cycle.
A large portion of transaction revenue is from customized pricing on the Coinbase Prime (now Advanced Trade) platform based on customer needs between trading, custody, financing, and other products. As a result, the custodial revenue quarter to quarter will vary, as those less familiar with the application will use the “regular,” interface with higher fees (e.g., when new customers are on boarded during bull runs they use the “regular” interface and pay the higher fees unbeknownst to them)
When Coinbase first IPO’d their Transaction Revenue was roughly 96% of their total earnings, whereas today the two revenue buckets are practically even at 50%. This smoothing of the earnings impact over recent years has showcased Coinbase’s determination to be less reliant on the swings of crypto’s “popularity” and focus on ways to generate other, more stickier revenue.
Subscription and services revenue is less volatile as it is made up of recurring revenue streams that are somewhat more predictable.
In August 2023, Coinbase purchased a stake in stablecoin issuer Circle.
Circle mints and manages billions of their U.S. Dollar stablecoin, USDC. Circle recognizes revenue in the process by capitalizing on the interest rate that treasuries provide. With the new arrangement between Coinbase and Circle, Coinbase now earns roughly 50% of the revenue yielded by these treasuries.
Stablecoin Revenue is largely impacted by the free-risk rate and how it fluctuates throughout the year. Although the yields may fluctuate, they are less volatile than Transactional Revenue and more predictable in the short-term.
[For a more comprehensive rundown of the stablecoins and USDC please see our analysis on USDC]
Prior to Q3 2023, Coinbase used to bucket Stablecoin Revenue in Interest Revenue but has since broken it out. Interest Revenue now refers to the interest earned to customer deposits.
Somewhat similar to USDC, Coinbase invests in short-term treasuries with customer USD that remains on exchange. Like Stablecoin revenue, Interest Revenue is impacted by the risk-free rate but is also impacted by the amount of customer deposits held on exchange (e.g., if less cash is deposited by customers, Coinbase earns less interest revenue than if they had deposited more). Thus, Interest Revenue is highly reliant on the amount of USD that customers hold an exchange, which is typically higher during bull markets, when customers are looking to trade cryptocurrencies.
Blockchain rewards refers to staked ETH and other cryptocurrencies that are able to earn a yield on their respective networks. In short, Proof-of-Stake is a blockchain consensus model that allows validators to stake their crypto to secure the network, and in turn earn a yield on their staked cryptocurrencies. Coinbase provides staking services across various networks, allowing customers to deposit their crypto, such as ETH, and thus earn a yield on their staked crypto. Coinbase runs and operates various nodes and validators to facilitate these networks, utilizing their name, likeness, and product suite to extract a premium for the services they provide their customers. As such, Coinbase takes 25% of the total yield it generates for its customers, which is more than the standard fee charged across DeFi staking protocols such as Lido and Rocket Pool. Additionally, Coinbase has their own crypto assets that they stake to generate additional yield for the enterprise.
Staking yield, like Proof-of-Work, diminishes over time (e.g., the Bitcoin halving). As such, as the quantity of ETH staked on Ethereum increases over time, the staking reward that all ETH stakers are able to earn declines. Additionally, if the crypto prices go down over time, the reward amount denominated in US dollar decreases. Yet, with the available infrastructure that Coinbase has built out to support staking, they will continue to attract more customers who are open to staking their dormant crypto to earn a yield, in-turn increasing Coinbase’s overall staking yield.
Custodial Revenue refers to the fees Coinbase charges its customers to manage and facilitate cold storage solutions.
Coinbase earns a fee which is “based on a contractual percentage of the daily value of assets under custody.” The fee is collected on a monthly basis and the customer may terminate the contract at any time without incurring any penalty.
As we will cover in Product Developments, Coinbase provides custody for large, institutional clients with many of those financial services companies having recently submitted applications for crypto ETFs. With Coinbase listed as their custodian for those securities, Coinbase is poised to increase the amount of custodial revenue they generate.
Any revenue that does not fall into the above buckets gets roped into Other. These areas include Prime Financing (such as: margin trading, shorts, lending, etc.), Coinbase One – Coinbase’s subscription platform that offers zero trading fees and other features, and budding revenue streams such as Base, Coinbase’s Ethereum L2
Perpetuals, otherwise known as perps, are crypto futures contracts. Operating in the muddy waters of regulation, perps offer crypto traders the ability to “bet,” on the future price of any specific crypto. Due to the regulatory clarity (or lack thereof) and uncertainty, a majority of perp markets operate off-shore (that is, outside of the US).
An approximation of the perps market puts the total value locked (TVL) at roughly 3x the spot markets. Additionally, the perps market is API-based, meaning that all trades that take place are done by computers – there is no “BUY” button for retail. Coinbase wants to change that.
Currently, Coinbase offers perps to qualified traders in select non-US jurisdictions. As the regulatory landscape changes in the US we may begin to see Coinbase expand operations within the US, however in the meantime they are able to capture revenue in markets they were unexposed to previously.
To put some numbers in context, assuming Coinbase captures a flat 0.1% fee on their perps volume:
If they are able to capture BitMex’s perp volume over the last year they would generate an additional $200M in revenue
If they are able to capture FTX’s perp volume in 2021 they would generate an additional $720M in revenue
If they are able to capture 25% of Binance’s perp volume they would generate an additional $3.6B in revenue
So far, in 2023, there have been 12 applications submitted for spot Bitcoin ETFs. Due to the existing regulatory processes these ETFs have not been greenlit by the SEC, yet are expected to receive approval by early 2024. For these spot BTC ETFs to go-live, the financial services companies that are bringing these securities to market must hold the asset (in this case, BTC) that back these securities. Some of the enterprises are crypto-native and/or are tech-savvy enough to custody their own BTC. However, a majority of the financial institutions are not privy to the way of cryptocurrencies and must choose others to custody their BTC for them.
Nine of the twelve applications thus far have selected Coinbase to be the one to custodian their Bitcoin for them. While we are unsure of the fees that Coinbase is charging institutional clients, especially at this amount, to custody their crypto, it is fair to assume that it will be a very sizable amount and a recurring source of revenue.
As market sentiment & interest grows once the BTC ETFs are brought to market, Coinbase’s reputation as a custodian will attract not only repeat customers when other crypto ETFs go-live (ETH, SOL, etc.), but new customers eager to enter the space as well.
Coinbase Commerce is attempting to change the way we transact by integrating crypto payments into a point-of-sale (PoS) system. With over 100+ currencies and wallets to choose from, “customers can pay with their preferred wallet and currency across Base, Ethereum, and Polygon.” In conjunction with their stablecoin, Coinbase Commerce will automatically convert any customer’s crypto of choice into USDC with as little volatility as possible. Settlement is near instantaneous, with pre-configured payment options tied to customer wallets so users do not have to re-enter necessary info – unlike today, where customers have to constantly re-enter and verify credit card information.
Not to mention, Coinbase has Shopify CEO and co-founder Tobi Lutke on their board of directors. While the two may appear to be competitors, vast industry knowledge with years of experience in PoS and eCommerce will prove insightful for this budding product.
Coinbase wallet offers users an immersive Web3 experience. Coinbase customers are able to transfer crypto effortlessly between their accounts on Coinbase Exchange to and from their Coinbase wallets. While users are able to send crypto to any wallet of their choosing, this seamless integration allows Coinbase customers to track their crypto transfers more efficiently, while being able to use one wallet for various networks (e.g., Ethereum, Solana, etc.). Decentralized applications (DApps) have even begun allowing connection to the Coinbase wallet, allowing the onboarding of more crypto users to the DApp space more efficient
From the Coinbase wallet, users are able to bridge, buy, swap, and do pretty much every function possible on the Coinbase exchange from the comfort of their crypto wallet. Even more so, Coinbase wallet users are able to send encrypted messages (i.e., Telegram) to other Coinbase wallet addresses. To make the process of sending messages and crypto more efficient, Coinbase provides all Coinbase wallet addresses the capability of creating their own Ethereum Naming Services (ENS) subdomain using the Coinbase (cb) domain. For instance, instead of typing in a long wallet string, Coinbase would allow us to claim a profile name of nomics.cb.id which would allow anyone to type in that name to be able to send us a message or crypto of choice.
To enhance the user experience, Coinbase wallet now allows users to send each other crypto via text much like other competitors, such as Venmo and ApplePay
Additionally, as with any cryptocurrency wallet, Coinbase allows all users to buy, sell, and trade any NFTs of their choosing. These NFTs can be held in the Coinbase Wallet or via their account on the main Coinbase exchange. Users can navigate through the Coinbase NFT marketplace, or use one of the many NFT Marketplaces provided through the Coinbase portal (or one of their own choosing).
In 2023 Coinbase launched their own Ethereum L2 (e.g., blockchain network that uses Ethereum for settlement). Base is entirely open-source, decentralized, and has seamless integration with Coinbase and their entire product suite at a fraction of the cost. With Base, Coinbase is hoping to entice both popular Web3 DApps, large corporate applications, and the like to build on the L2 to increase real-life use cases for users (outside of just crypto native users) at a fraction of the transaction costs that it takes on other L1s and existing sidechains. While Base’s profit margin is currently higher than existing, comparable side chains (60% vs. the 25% average) the profit margin is expected to decline as more users use lower gas fees.
While revenue generation is a by-product of owning their own L2, there is not a huge expectation for Base’s income to impact Coinbase’s bottom line. In actuality, Base’s value proposition stems from Coinbase’s ability to drive existing and new users to the cheaper, faster L2, which will attract developers to Base, thus increasing the usage of Coinbase’s product suite – producing a never-ending positive feedback loop
On June 6th, 2023 the SEC charged Coinbase for operating as an unregistered exchange, broker, and clearing agency. In addition to these claims, “the SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.” Amidst the legal battle, the SEC alleges that Coinbase (among other exchanges such as Kraken and Binance) listed tokens, such as Solana ($SOL), Cardano ($ADA), and Polygon ($MATIC), that resemble securities.
There are a few things to note regarding these filings:
Cryptocurrencies such as Bitcoin ($BTC) and Ethereum ($ETH) are not listed in the filing — they have subsequently also been deemed commodities by the CFTC
Coinbase has motioned to dismiss these claims
Coinbase has relentlessly asked for guidance from the SEC, to which none has been provided
Yet, the most prevalent point that analysts have pointed out is that the SEC allowed Coinbase to go public… and then sued them after the fact. As a rebuttal, many have claimed that while the SEC did allow the crypto company to become publicly listed, this was not the SEC passing merit on the business.
Additionally, while the staking services claim is a separate matter, there is a lot of focus surrounding the numerous cryptocurrencies that Coinbase has listed that the SEC deems as potential securities. While there is no immediate ruling or guidance on cryptocurrency classification (besides the out-dated Howey test used for securities), this matter must be monitored as a final verdict not in favor of Coinbase could have major implications and repercussions for the organization and cryptocurrency market as a whole.
One of the largest concerns regarding Coinbase encompasses the entire crypto industry as a whole and the regulation thereunto. For instance, as we mentioned earlier, Coinbase and a number of other crypto exchanges have been sued by the SEC for many reasons but one in particular stands out – operating an unregistered securities exchange. As indicated by the wording, many cryptocurrencies are being classified as a security and not a monetary instrument or commodity (although assets such as Ether and Bitcoin have been classified as commodities by the CFTC). While Coinbase is much more than an aggregate of available cryptocurrencies, their business model relies entirely on the regulation of those assets. Case in point, if those cryptocurrencies in question in the SEC lawsuit are deemed to be securities than Coinbase will be docked as a result and their future actions, revenue, and products will suffer as a result.
Another key issue with cryptocurrencies currently is the way that they are taxed. Regardless of the way a cryptocurrency is used (e.g., traded, swapped, used to purchase an item), a taxable event typically occurs. For example, if a user purchases $50 of BTC with USD, the price of the same amount of BTC, denominated in USD, appreciates to $100, and that BTC is then used to purchase a $100 gift card, the user must pay $50 of capital gains tax ($100 - $50 = $50) and must be privy to the taxable event that just occurred. While these events may not outright affect Coinbase, they will impact the number of users that decide to use Coinbase and their products in the long run, as well as include Coinbase in these events if one, or any, of their products are used during these transactions.
For the industry at large, the uncertainty surrounding the regulation of crypto has kept many institutional players at bay from purchasing and holding crypto assets on their balance sheets (such as BTC and ETH). In some otherwise positive news, the Financial Accounting Standards Board (FASB) recently released new rules that will require companies to account for cryptocurrencies at fair value, otherwise called fair value accounting. From the FASB,
“Under the new guidelines, which are the first of their kind in the United States, businesses will need to disclose the value of cryptocurrencies based on their market prices at the end of each reporting period. Previously, the old treatment accounted for Bitcoin as an intangible asset, which meant if the price went lower than what companies bought it for, they had to take an impairment charge on their books, even if they didn't sell. But if the price went up, they couldn't receive any benefit on their books unless they sold.”
The new FASB rules and impending crypto ETF approvals will hopefully entice larger institutional clients to hold crypto and crypto derivatives on their balance sheets, but regulation as a whole will continue to require constant monitoring as an overall concern for the crypto industry (especially as it pertains to Coinbase).
As we mentioned previously, a large part of Coinbase’s revenue (roughly 50%) stems from the fees collected on customer trades. More so, the fees collected tend to increase during crypto bull markets as new entrants decide to use and buy crypto as they use the main interface – instead of Advanced Trade – which offers higher fees. While Coinbase’s revenue split has decreased from a high of 96% in the past, the company still heavily relies on the revenue generated from trading as a means of income. This reliance on crypto trading, and thus market cycles, in turn labels the crypto cycle as a huge concern.
As the crypto cycle becomes a bull market (whether due to regulation, major news, blockchain updates, Bitcoin halving, and more) the increase of transaction revenue is limitless, while the inverse of a bear market can cause these transaction revenues to steeply decline. Although we may be able to identify the reasons that may cause crypto bull and bear markets, it is less plausible to pinpoint and predict when a certain market will occur, making the forecasting of future revenues largely unpredictable. As we’ve seen, Coinbase has made a large, conscious effort to decouple from the crypto cycle, however the parallel similarities between the two must be kept in mind and monitored, especially during periods of macroeconomic turmoil and with short-term investment horizons.
Coinbase has lamented themselves as a staple within the crypto ecosystem. Domestically, Coinbase has proven that they are the safest and most capable of all the US-based exchanges. Garnering first mover advantage and developing a consistent & proven track record, Coinbase has shown their ability to play by the book since their inception and their willingness to work with regulators. With an avid screening process for listing cryptocurrencies, Coinbase remains committed to providing investors what they ask for while ensuring they do not provide unregulated securities and other fraudulent investment vehicles
With active marketing & advertising campaigns, Coinbase has continued to try and move the needle on overall crypto adoption. Active lobbying efforts, both at the federal and state levels, show Coinbase’s commitment to the cause and their goal to sticking to current regulatory guidelines. Game changing ad experiences (such as a QR Code Super Bowl commercial), an active management team on social media channels (e.g., X), and a number of institutional partnerships have gained Coinbase the trust and interest of their customers.
Coinbase continues to actively invest in the crypto space via Coinbase Ventures and other strategic acquisitions. This active commitment to grow the crypto ecosystem will likely prove to be a great long-term investment as it will prove to be a positive feedback loop – the more users that use Coinbase-based products, that seamlessly integrate with Coinbase Exchange (and other products), will draw capital and users to the platform. For example, Coinbase Financial Markets (CFM) recently gained regulatory approval from the National Futures Association (a CFTC-designated self-regulatory organization) to operate a Futures Commissions Merchant (FCM) and offer eligible US customers access to crypto futures. User’s that are onboarded to Coinbase to actively engage in perp trading will most likely venture into and explore other Coinbase offerings and products.
Abroad, Coinbase has continued and will continue to expand its international presence. Recently, Coinbase has launched products in Canada and registered as a cryptocurrency exchange and custodian wallet provider with the Bank of Spain. More so, Coinbase has established Ireland as their Markets in Crypto-Assets Regulation (MiCA) hub, which institutes uniform EU market rules for crypto-assets.
In all, Coinbase has a large foundation with a unified goal that they focus on enhancing, strengthening, and supporting. Currently, Coinbase is the only public crypto exchange listed and traded in the US, which attracts a lot of liquidity from institutions and consumers alike wishing to gain exposure to the crypto industry. As an enterprise, the fact that Coinbase’s co-founder Brian Armstrong remains at the helm of the organization as CEO is a testament to the company's resilience, longevity, and commitment to vision. Other large corporations with founder CEOs, such as Microsoft, Google, Facebook, and the like, have grown their unicorns to astronomical heights and market dominance – and we believe the same is to be very likely here. While there are likely more pros and cons that we have not listed in this analysis, from what we have gathered from our lengthy discovery period, and piecing together this report, we would argue that so far the pros outweigh the cons. Additionally, while we do not discuss price action, price targets, or value relative to price, we cannot say for certain whether Coinbase’s share price is over- or under-valued. However, what we can say for certain is that Coinbase has identified a solidified niche, of which they operate in very well & better than any of their competitors, and have developed a moat around them of which they will maintain for some time to come.
Total Transaction Revenue: ⬇️ 21% YoY | ⬇️ 12% QoQ
Consumer, Net: ⬇️ 21% YoY | ⬇️ 11% QoQ
Institutional, Net: ⬇️ 29% YoY | ⬇️ 18% QoQ
Total Subscription and Services Revenue: ⬆️ 59% YoY | ⬇️ < 1% QoQ
Stablecoin Revenue: ⬆️ 124% YoY | ⬆️ 14% QoQ
Blockchain Rewards: ⬆️ 19% YoY | ⬇️ 15% QoQ
Interest Income: ⬆️ 59% YoY | ⬇️ 21% QoQ
Custodial Fee Revenue: ⬆️ 9% YoY | ⬇️ 7% QoQ
Other Revenue: ⬆️ 3% YoY | ⬇️ 10% QoQ
Total Revenue: ⬆️ 14% YoY | ⬇️ 5% QoQ
Corporate Interest and Other Income: ⬆️ 265% YoY | ⬆️ 13% QoQ
While a majority of the revenue streams and explanations have been divulged in the above “Business Model” section, we will reiterate a few key points here:
Both Stablecoin Revenue and Interest Income increases are largely due to
An increase in funds moved to Money Market Funds (MMFs) whether for deposits or USDC minting purposes
An increase in the overall Federal Funds Rate (which sat at around 5% for a majority of the year)
Transaction Revenue (and thus Overall Revenue) is impacted by Total Volumes (below) – and with the crypto markets in a down year, overall trading volumes declined both QoQ and YoY
Consumer makes up 95% of overall Transaction Revenue while Institutional makes up only 5%
Drawing attention to Coinbase’s reliance on consumer trading for revenue generation
Coinbase has attempted (and succeeded) to reduce their reliance on Transaction Revenue as it is heavily reliant on the crypto market cycle – Q3 2023 marked the 2nd straight quarter in which Total Subscription and Services Revenue outpaced Total Revenue
Even in a “down” quarter, Coinbase has managed to increase Total Revenue by diversifying their revenue streams. While numerous factors impact Coinbase’s ability to generate both Transaction and Subscription revenue, Coinbase is poised to continue on their existing trajectory with their large product suite, attentiveness to their customers, and ability to grow globally while remaining within regulatory guidelines.
Total Operating Expenses: ⬇️ 34% YoY | ⬇️ 4% QoQ
Transaction Expense: ⬇️ 11% YoY | ⬇️ 16% QoQ
Sales and Marketing: ⬆️ 3% YoY | ⬇️ 7% QoQ
Technology and Development: ⬇️42% YoY | ⬆️ < 1% QoQ
General and Administrative: ⬇️26% YoY | ⬇️ 2% QoQ
Crypto Asset Impairment, Net: ⬇️41% YoY | ⬆️ 188% QoQ
Other Operating Expenses, Net: ⬇️ 94% YoY | ⬇️ 81% QoQ
Full-Time Employees (FTE): ⬇️ 27% YoY | ⬆️ < 1% QoQ
Overall expenses appear to be down over the most recent quarters, yet this is to be expected due to the depressed revenues due to an overall crypto bear market – with less revenue coming in, expenses are to be more tightly managed. However, while the total amount in USD is down across transaction and sales & marketing expenses, the expenses as a percentage of net revenue remains consistent with prior quarters (15% and 13% respectively); highlighting Coinbase’s commitment to growth and operations.
Coinbase continues to contribute capital to the enhancement and maintenance of existing infrastructure, while also exploring new avenues in research & development, as is evident by the roughly $250M in Technology and Development in Q3 2023. The decline in General and Administrative expenses from Q4 2022 to Q1 2023, and throughout 2023, can mostly be attributed to the reduction in workforce brought upon by a large wave of tech layoffs in the US in late 2022 and early 2023.
It is extremely apparent that a majority of Coinbase’s expenses can be attributed to Technology & Development and General & Administrative costs. More so, as is evident above, net revenue has increased QoQ while the two aforementioned major expense buckets have decreased (as well as Nine Month Ending YoY). Due to both factors, Coinbase’s operating loss has decreased as well – from (556M) in Q3 2022 to (80M) in Q3 2023. At this rate, Coinbase will likely turn an operating profit by Q3 2024, if not sooner.
Total Trading Volume: ⬇️ 52% YoY | ⬇️ 17% QoQ
Consumer: ⬇️ 58% YoY | ⬇️ 21% QoQ
Institutional: ⬇️ 51% YoY | ⬇️ 17% QoQ
As previously noted, Coinbase transaction volumes seem to follow the crypto cycles.
As trading volumes are what contribute to overall Transaction Revenue, the following 2022 bullet points are extremely noteworthy:
2022 Average Take Rate on Retail Volumes was 1.35% – meaning for every $100 traded CB made $1.35
2022 Average Take Rate on Institutional Volumes was 0.017%
Institutional Volumes are more than 5x Consumer, 85% of the Total Volume on Coinbase – yet only responsible for 5% of the Transactional Revenue. With that being said, a slight increase in the take rate on Institutional Volumes would add a tremendous amount to Coinbase bottom line given the recent average take rate.
More so, 55% of all Transaction revenue is a result of Bitcoin (37%) and Ethereum (18%) trades. Thus, more than half of overall cryptocurrency volume on the Coinbase exchange can be attributed to the two largest “blue chip” coins. While not indicative of any overall sentiment towards Coinbase, these volume numbers do show the solidified positioning of both Ethereum and Bitcoin in the minds of both retail and institutional investors. More so, with the introduction of Base, close working relationship with the Optimisim team, and Ethereum staking services provided, large Etherem transaction volumes on Coinbase pair well with Coinbase’s attentiveness to the Ethereum ecosystem.
As confidence in the crypto markets begins to regain strength, Coinbase and the broader crypto ecosystem (including DeFi) will likely see an uptick in trading volumes and thus revenues.
As of the end of September 2023, Coinbase held a total of $5.5B in Total U.S. Dollar Resources (otherwise referred to as $USD). $USD resources are defined as cash and cash equivalents, USDC, and custodial account overfunding.
Following the conclusion of Q3 2023, the Total $USD Resources were up $20M QoQ.
The $3.68B of $USD Resources held in Money Market Funds (MMFs) can be broken down into a few buckets, including excess customer funds, liquid backing for USDC resources, and dormant funds on exchange. Additionally, a large part of Coinbase’s revenue is tied to the amount of funds in the MMFs. For instance, a hypothetical 100 bps (1%) increase or decrease in average interest rates applied to Coinbase’s daily balances held at the end of Q3 2023 would have resulted in a $46M swing in either direction. While not all of the $USD resources held in MMFs are immediately liquid or for corporate use (e.g., tied to USDC, customer funds, etc.), they do provide Coinbase a substantial portion of their quarterly revenue.
With that being said, Coinbase has over $1.6B of liquid cash and cash equivalents between USDC and corporate cash to cover any recurring or unique expenses that arise. While there is roughly $163M of corporate cash held at third party venues, most of those $USD resources are restricted and/or tied to other assets as collateral.
In addition to Coinbase’s Total $USD resources, Coinbase also holds investments in various crypto assets that it neither trades nor plans to sell in the short-term. The impaired cost basis of these assets is roughly $311M, however following FASB’s new fair-value accounting rules for Crypto, the fair market value of these held crypto assets will soon be realized at $572M (if the new accounting rules were in place at the time of filing).
Conclusively, with $572M in total crypto assets held as investments and $401M of USDC held as $USD resources, Coinbase’s “personal” crypto investment holdings totals over $1B.
While the Key Metric’s segment in this narrative analysis provides you an in depth look at Coinbase’s recent financial operations, a more comprehensive view of Coinbase’s financial health can be found in their Financial Statements.
Additionally, the aforementioned Google Sheet containing Coinbase’s Financial Statements may not contain all necessary or required documentation and explanations – for a full overview of all activities and description please take a look at Coinbase’s 10K (or 10Q) depending on your needs.
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