Source: Company Financials, Leverage Shares analysis

Retail investor transactions, which once accounted for nearly all of the company’s revenues, now account for a little under half of net revenue. In overall trends, subscriptions and services have shown strong two-year growth trends that rather handily offset two-year declines in transactions with stablecoins mostly accounting for most of the former’s growth. However, despite greater revenue passthrough for adjusted EBITDA, net revenue is down 3% relative to the last year.

The overall declining trends in custodial fee growth indicate that the notion of cryptocurrencies as an alternative to the present system of fiats doesn’t find increasing traction. This could be attributable to the fact that extensive real-world “fungibility” in as ubiquitous a fashion as fiats isn’t currently evident. However, there is a pretty strong forward outlook over the suitability of cryptocurrencies as an investment asset that could be readily translated into fiats and vice versa until it does happen, as evidenced by the bumper volume trends in Bitcoin ETFs this year. In most days since their launch, daily volumes in these ETFs have surpassed $1 billion. Given that Coinbase is custodian to 8 of the 11 Bitcoin ETFs launched, it is likely that custodial fees have seen a significant uptick. However, since trading of these ETFs commenced shortly after SEC approval on the 10th of January this year, these wouldn’t be accounted for in this earnings release. Institutional custodial fees are lower than transaction fees; thus, there will be some trade-offs between the two going forward.

However, one significant challenge Coinbase will face within the Bitcoin ETF market will be that there is now a strong incentive for other exchanges to enter the market with custodial platforms of their own. How the company will respond to such a challenge has been left unsaid for now but it’s very likely that there will be some significant announcements in the year ahead.

“Fungibility” currently not being evident is likely one factor behind intense speculation currently swirling around cryptocurrencies that aren’t Bitcoin or Ethereum. This speculation creates additional monetization channels for the company going forward. In May 2023, the company launched “International Markets” to select international customers. By Q3 2023, it had listed 15 perpetual futures contracts on different cryptocurrencies and onboarded over 100 institutions to generate approximately $10 billion in trading volume¹. In November, Coinbase Financial Markets (CFM) began to platform regulated derivatives for the U.S. market. Typically, derivatives markets tend to be much larger than spot markets: as time progresses and participation eligibility becomes clearly defined, it is likely that derivatives will be the next volume and growth driver for the company.

On the matter of “fungibility”, the company’s Base platform went online in August. The platform, a “layer 2” blockchain built atop the Ethereum blockchain, aims to help Coinbase customers stay onchain and translate their holdings to and from fiats and for real-world applications more effectively. In 2016, Coinbase CEO Brian Armstrong had outlined² in the company’s “Secret Master Plan” that the final phase of the company (“Phase 4”) would be to enable the building of apps for an open financial system the world over to facilitate everything from investing to loans and global remittances. The matter of remittances alone is a target-rich environment³: in a market where several hundreds of billions of dollars are remitted by foreign workers and global corporations on a yearly basis, it cost 6.2% on average to send $200 with banks averaging at around of 12.1% as of Q2 2023. As recently as October last year, computation service L2Fees estimated that a $200 transfer to countries in Sub-Saharan Africa – which normally would have cost upwards of 7.8%. – cost just 0.02% on an Ethereum Layer 2 network. There is significant public utility and monetization potential for Base which, at the time of writing, is the 4th largest L2 player with total value locked (“TVL”, which denotes the amount locked into escrow on Ethereum) of $855 million.

With greater international market exposure, it’s entirely possible that the company’s international and institutional customers could address a number of limitations currently within the financial services industry and unlock significant benefits via a network of cryptocurrencies, stablecoins and onchain apps to translate them into fiats via interlocking with Central Bank Digital Currencies (CBDCs) currently being run in Japan, India and China to then access better remittance translations via their respective networks with other currencies. All in all, Coinbase is well-positioned to tap into a significant number of possibilities in the steadily-nearing future as well as current trends in the Bitcoin ETF market.

Footnotes:

1. “Coinbase International Exchange to Launch Spot Markets”, 14 December 2023, MarketsMedia
2. “The Coinbase Secret Master Plan”, 8 September 2016, The Coinbase Blog
3. “Stablecoins: An Evolving Tool Against Remittance Costs”, 20 December 2023, Asianomics (on Substack)