04.06.2024 Issuer Call Redemption Notice

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Coinbase: Crypto Summer and Stablecoin Tailwinds?

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The fortunes of Coinbase, touted as America’s leading cryptocurrency exchange, has been considered to be a leading barometer of interest in crypto assets for quite a while now. The company’s Q3 earnings release, however, heralds some interesting signs of change.

Revenue came in strong at $674.1 million – an increase of 14.2% over that in the same time last year and $20.6 million higher than analysts’ consensus opinion. In the Year Till Date (YTD) versus the same period last year, stablecoin revenue has skyrocketed by 522%. The reason for this massive spurt in stablecoin revenue lies in the way the exchange handles USDC, the top stablecoin in its network. Effective August 18th of this year, Coinbase has started earning a pro rata portion of income earned on USDC’s reserves and other related activities. Since the issuer of USDC backs the stablecoin with assets such as dollar deposits and short-term securities, the rise in interest rates has been a highly profitable proposition for both issuer and Coinbase.

There is a factor for concern for the overall cryptocurrency market: transaction volume of crypto assets has fallen below total value of crypto assets in dollar terms for the first time since 2022.

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In the 3 quarters of 2023, Coinbase has seen a 16% decline in Monthly Transacting Users (MTUs) – defined as consumers who actively or passively transacts in one or more products on the platform at least once during the rolling 28-day period ending on the date of measurement – and a 54% decline in trading volume. Consumer trading volume is down 69% while institutional volume is down 50%.

Total transaction revenue in the YTD is 51% lower than in the same period last year. 48.7% of all customer crypto assets held by customers and 37% of transaction revenue is from Bitcoin. The company has registered a loss in trading volume in virtually every crypto asset except for Bitcoin, wherein the share of trading volume registered a 28% increase. Stablecoin USDC witnessed a 400% increase on the back of a strong dollar continuing to throttle the competitiveness of American goods and services and a flight of capital from broader equity markets into a narrow band of instruments that includes Treasury bills, high-quality corporate paper, and dollar-backed assets. The company’s stablecoin business is a pretty straight-forward business with enormous potential: they’re often needed to imply “real world value” onto various crypto chains and is expected to continue to capture and develop interest in the future.

Coinbase also just received a full business license to operate in Singapore in a bid to attract a lot of international business, predominantly institutional players. The U.S. accounts for 89.5% of the business in YTD 2023, which is up from 82.8% in the same period last year. The Singapore connection might prove to be transformative for the company’s bottom line in the future.

It is perhaps intuitive that – given its preponderance in the company’s revenue streams – Bitcoin’s trajectory informs that of Coinbase stock. While Bitcoin is meandering in the near term, it is noted that BTC generally tends to rally ahead of and following its halving cycles.

A “halving” has been a pivotal event for Bitcoin’s blockchain wherein the reward for mining 1 Megabyte (MB) of transaction records is cut in half. Empirically, the rate at which new Bitcoin is created decreases by half for every 210,000 blocks mined — roughly every four years. This has happened three times in the past.

Since 2020, network participants validating transactions have been awarded 6.25 Bitcoins (BTC) for each block successfully mined. The next halving is expected to occur in early-to-mid 2024. Thus, on account of the increasing scarcity of Bitcoin, there is some support for BTC’s price to rally.

However, it can be seen empirically that the price performance of Coinbase has exceeded that of Bitcoin over the past one year.

This suggests an overall conviction that Coinbase isn’t just about Bitcoin and is looking to grow beyond the U.S. The road ahead can be expected to be rocky but there are some tailwinds for its stablecoin business if rates stay “high long” and the U.S. dollar continues staying strong. However, like with the fixed-income market, resurgence in interest towards broader U.S. equities would likely prove to be a damper for its non-Fiat crypto asset values and volumes. All in all, it might pay to keep an eye on the company’s upsides and downsides.

Professional investors interested in making tactical strategies on the trajectories can consider CON3 – which gives a magnified daily-rebalanced exposure to the upside of the stock – as well as CO3S, which does the same on the downside.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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