Coinbase earnings show the company is now much more than just an exchange

Coinbase, a leading U.S. cryptocurrency exchange, shared its second-quarter results on Aug. 3. Despite showing a net loss, some positives emerged, like a 13% cut in operating expenses from the last quarter and a 3% boost in its cash reserves to $5.5 billion.

Coinbase key financial metrics, in millions of dollars. Source: Coinbase

However, the exchange took a hit with a $97 million net loss, worse than its previous quarter, and saw a 32% drop in its adjusted EBITDA to $194 million in Q2.

Services and USDC stablecoin impact growth

One downside was the 7% fall in subscription and service revenue from Q1. The letter to shareholders revealed that a 28% decrease in the USD Coin (USDC) market cap partly caused this. Since Coinbase holds a stake in Circle, USDC’s issuer, it gains from the interest rate offered by the stablecoin reserves.

Additionally, customer fiat balances deposited at the exchange serve as another revenue source. But despite these, Coinbase’s interest income fell by 16% from the last quarter to $201 million in Q2.

Even so, the numbers suggest that Coinbase has successfully lessened its dependence on trading fees. Subscription and service revenues matched trading revenues in the first half of 2023, a shift more noticeable when considering transaction costs consume about 15% of its revenues. This suggests that Coinbase has transitioned from a trading firm to a service broker, prioritizing recurring revenues.

*Coinbase share price (blue, right) vs. crypto total market cap (orange, left). Source: TradingView*

Looking at Coinbase’s (COIN) share price, there isn’t a clear sign of this shift in focus throughout 2023. This suggests that either investors still firmly believe that trading fees will remain the key income driver for the company, or they simply haven’t been crunching the numbers as diligently as they should.

It’s impossible to accurately predict what direction the cryptocurrency market will take in the next few years, but one can certainly assess Coinbase’s potential to ramp up its services and subscription revenues, independent of how trading fees pan out. There are several notable events on the horizon that could significantly cut the exchange’s reliance on trading.

Events on the horizon that could significantly cut the exchange’s reliance on trading

The first is that Tether (USDT), the largest stablecoin by market cap, is eventually sued by the Department of Justice and loses its banking partnerships. If this happens, USDT could suffer a considerable loss in market cap. This scenario could create a massive opportunity for USDC to swoop in and fill the void. Because Coinbase enjoys revenue from Circle, the issuer of USDC, such a shakeup could potentially multiply Coinbase’s service revenue by up to four times.

Second, Binance could be effectively shut down by regulators. Despite its stance as the reigning champion of cryptocurrency exchanges in terms of trading volume, Binance has been attracting attention from regulators worldwide, and not the good kind. If regulatory pressures were to effectively shut down Binance, it could pave the way for Coinbase to seize a substantial increase in market share. The knock-on effect would likely be a significant boost in service revenues for Coinbase.

Third is the potential launch of Bitcoin spot exchange-traded funds (ETFs) in the United States because this could be a game-changer for Coinbase. The company has already entered into surveillance-sharing agreements with ETF issuers, and it’s ready to provide custody services. This new avenue would create an additional source of revenue for Coinbase.

Lastly, it’s important to remember that while Coinbase’s current focus is on cryptocurrency trading and custody services, the company has plans to diversify and expand its product offerings. For instance, it’s planning to launch a margin trading platform and a cryptocurrency lending platform. These new products and services have the potential to generate significant revenue from services and subscriptions.

The plan is being executed, but only time will tell if it is a winning strategy

The crypto landscape’s volatility clouds judgment on whether Coinbase’s pivot to non-trading revenues is the right call. But signs are showing that Coinbase is agile and adaptive, slashing expenses and fortifying its cash chest. The company has managed to match subscription revenues with trading revenues, a clear indicator of this adaptability.

The billion-dollar question, however, is whether the investors will acknowledge and reward this shift in revenue generation. Currently, it seems that investors aren’t paying adequate attention to Coinbase’s strategic revamp, but if some of the scenarios mentioned before come to life, investors could be in for a pleasant surprise. It’s a dynamic space, and this crypto giant seems to be playing its cards strategically.