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

Coinbase, one of the leading cryptocurrency exchanges in the United States, shared its second quarter results on August 3. Despite a net loss, some bright spots emerged, such as a 13% reduction in operating expenses from last quarter and a 3% increase in its cash reserves. at $5.5 billion.

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

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

Services and USDC stablecoin impact growth

One downside was the 7% decline in subscription and services revenue compared to the first quarter. The letter to shareholders revealed that a 28% decline in USD Coin (USDC) market capitalization was partly to blame. Since Coinbase owns a stake in Circle, the issuer of USDC, it takes advantage of the interest rate offered by stablecoin pools.

In addition, client fiat balances deposited on the exchange are another source of income. But despite that, Coinbase’s interest income fell 16% from last quarter to $201 million in the second quarter.

Even so, the numbers suggest that Coinbase has managed to reduce its reliance on trading fees. Subscription and services revenue matched trading revenue in the first half of 2023, a change more visible when you consider that transaction costs consume about 15% of its revenue. This suggests that Coinbase has moved from a trading company to a service broker, prioritizing recurring revenue.

Coinbase share price (blue, right) versus total crypto market cap (orange, left). Source: Trading View

Looking at the Coinbase (COIN) share price, there is no clear sign of this shift in direction through 2023. This suggests that either investors still firmly believe that trading fees will remain the the company’s main revenue driver, or they just haven’t crunched the numbers as diligently as they should.

It is impossible to predict with precision what direction the cryptocurrency market will take in the next few years, but one can certainly assess the potential for Coinbase to increase its services and subscription revenue, regardless of the evolution of fees. negotiation. There are several notable events on the horizon that could significantly reduce the exchange’s reliance on trading.

Events on the Horizon That Could Significantly Reduce the Exchange’s Dependence on Trading

The first is that Tether (USDT), the largest stablecoin by market capitalization, is eventually sued by the Department of Justice and loses its banking partnerships. If this happens, USDT could suffer a considerable loss in market capitalization. This scenario could create a huge opportunity for USDC to rush in and fill the void. Since Coinbase benefits from revenue from Circle, the issuer of USDC, such a shake-up could potentially quadruple Coinbase’s service revenue.

Second, Binance could be effectively shut down by regulators. Despite its position as the reigning champion of cryptocurrency exchanges in terms of trading volume, Binance has attracted the attention of regulators around the world, and not the good kind. Should regulatory pressures indeed shut down Binance, it could pave the way for Coinbase to grab a substantial boost in market share. The ripple effect would likely be a significant increase in service revenue for Coinbase.

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

Finally, it is important to remember that while Coinbase is currently focused on cryptocurrency trading and custody services, the company plans to diversify and expand its product offering. For example, it plans 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 running, but only time will tell if it’s a winning strategy

The volatility of the crypto landscape clouds judgment as to whether Coinbase’s pivot to non-trading revenue is the right choice. But there are signs that Coinbase is nimble and adaptive, cutting spending and fortifying its vault. The company has successfully matched subscription revenue to trading revenue, a clear indicator of this adaptability.

Related: Coinbase to file order seeking dismissal of SEC lawsuit

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