Coinbase Shares Pop On Blowout Earnings

Shares of the crypto exchange are down from their debut in April, but up 20% over the past week.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

Shares of Coinbase were trading higher by as much as 8% today after reporting blowout earnings yesterday afternoon. The rally brings the stock’s one-week gains to almost 26%, with the crypto-focused company benefiting from the strong earnings report, as well as a stunning surge in cryptocurrency prices.

As reported on ETF.com on Tuesday, since bottoming out at the end of July, ether and bitcoin jumped 85% and 60%, respectively, putting them halfway between their recent lows and their all-time highs.

As one of the largest cryptocurrency exchanges in the world, and with ambitions to become a much broader platform within the crypto space, Coinbase’s fortunes are inextricably tied to the booms and busts in cryptocurrency prices—at least for now.

Coinbase Share Price


 

Skyrocketing Revenues

In the second quarter, Coinbase generated $2.2 billion of revenue—up a whopping 12-fold from the year ago period—and $869 million of adjusted earnings. Fueling the spike was a nearly sixfold increase in the number of monthly transacting users, from 1.5 million to 8.8 million; a fivefold increase in bitcoin prices, from an average of $8,650 to $46,500; and a more than 16-fold increase in trading volumes on the platform, from $28 billion to $462 billion.

The bulk of that volume came from institutional investors—$317 billion versus $145 billion for retail. However, as usual, retail investors were responsible for generating the vast majority of Coinbase’s revenues—$1.8 billion versus $102 million for institutions.

Transaction fees, which make up about 95% of Coinbase’s total revenues, are much higher for retail investors than for institutional investors.

This primarily reflects the fact that retail investors are less price-sensitive than institutional investors, but it’s also a function of the different way Coinbase monetizes the two groups. In the case of retail investors, custody is bundled together with trading, while institutions have to pay extra for custody.

No Longer Bitcoin-Centric

Notably, Coinbase said that ether accounted for a greater share of its trading volume than bitcoin for the first time ever—26% compared to 24%—and perhaps even more surprisingly, other crypto assets accounted for 50% of total volume. That’s a big change from last year when the bitcoin, ether and other categories equaled 57%, 15% and 28% of total volume, respectively.

Coinbase said that the dollar value of the assets on its platform now totals $180 billion, roughly evenly split between retail investors and institutions. The firm estimates that the $180 billion is equal to 11.2% of the total market capitalization of crypto assets worldwide.

Interestingly, though ether managed to steal the crown from bitcoin on the trading side, the latter still represents the bulk of assets held on the platform, with a 47% share versus 24% for ether, 24% for other crypto assets and 5% for fiat currencies.

Still, bitcoin’s share of assets is down from 64% last year, and Coinbase highlighted its expectation that digital assets other than bitcoin would continue to grow as a share of the cryptomarket.

The Amazon Of Crypto Assets

Speaking at the earnings conference call with analysts and investors, Coinbase CEO Brian Armstrong predicted that there would be millions of crypto assets eventually, and the firm wants to enable trading in most of them.

“We want to be the Amazon of assets, list every asset out there in crypto that's legal,” he said. “There are thousands of them today. There are eventually going to be millions of them.”

In addition to listing more and more crypto assets on its platform, Armstrong said he is positioning his company to connect more tightly with the numerous decentralized applications being built on top of public blockchains.

“We need to make it easy for people to connect to and integrate with all of these third-party apps out there,” he added. “With Coinbase Wallet today, which is our self-custody app, you can participate in all of these things—DeFi, NFTs, third-party applications—and a number of our customers are taking advantage of that. But how do we bring that functionality to the main Coinbase app, the one that has the majority of our users? That's the next thing we're working on. So we're doing that with a crypto app store, if you will, that's to be built right in the app.”

Embracing Decentralization

Armstrong’s comments suggest that while Coinbase is a centralized platform, it is fully embracing the decentralized world of crypto, adding value where it can through user experience, customer support, and additional features that abstract away a lot of the complexity of dealing with the crypto ecosystem more directly.

That’s why the company thinks it can maintain its fees, which are high compared to some competitors.

“We’ve said before that we do not compete on fees. And instead of focusing on being the lowest-priced platform, we focus on providing the most value to customers through our custody, our security in storage, in addition to trade execution, which is critical for bearer instruments like crypto,” explained Coinbase COO Alesia Haas. “On the retail side, these services are bundled into our transaction fee. We're really competing though for these users based on the product suite.”

With transaction fees making up 95% of its revenues, investors in Coinbase are hoping the firm can sustain its pricing power. Even if it can, the company’s transaction revenues are highly dependent on where cryptocurrency prices go. A precipitous slide in bitcoin and ether prices would dent Coinbase’s growth, and likely its stock—though the firm says it is well-positioned to withstand any such setback.

“We're very mindful that crypto is volatile, and we want to ensure we have enough cash and resources to weather any prolonged crypto winter cycle, and still be able to grow our business and execute on our business goals,” CEO Brian Armstrong noted.

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.