• By Amy Castor and David Gerard

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Coinbase is the biggest crypto exchange that deals in actual dollars, and it’s the first choice for new crypto users. The company went public (NASDAQ: COIN) in April 2021 and enjoyed a few good quarters in the crypto bubble.

But the bubble burst in May 2022 — and the customers just got up and left.

Last week, Coinbase posted its third-quarter earnings. It’s been nearly two years since the company turned a profit. Things have only worsened since the previous quarter. [shareholder letter, PDF; earnings call transcript; earnings call questions; 10-Q]  

Number go down

CEO Brian Armstrong said on the earnings call: “The American people are embracing crypto as more Americans grow unhappy with the traditional financial system.” Armstrong and COO Emilie Choi also harped on how “52 million Americans own crypto.”

Unfortunately, this isn’t sufficiently good news for bitcoin. Per the company’s shareholder letter: “Trading volume has been shifting away from the U.S., where our business is concentrated.” Or, from the 10-Q: “A significant amount of the Trading Volume on our platform is derived from a relatively small number of customers.”

Trading volume is the lifeblood of a crypto exchange — and Coinbase’s is through the floor. The exchange saw $76 billion in total trading volume in Q3, down from $92 billion in Q2. (They did $547 billion in trading volume in Q4 2021, their last profitable quarter.) 

That’s not good for trading fees. Here’s how the numbers have gone starting from Q4 2021:

• Q4 2021: $2,185.8 million from retail traders; $90.8 million institutional;
• Q1 2022: $965.8 million from retail traders; $47.2 million institutional;
• Q2 2022: $616.2 million from retail traders, $39.0 million institutional;
• Q3 2022: $346.1 million from retail traders, $19.8 million institutional;
• Q4 2022: $308.8 million from retail traders, $13.4 million institutional;
• Q1 2023: $352.4 million from retail traders, $22.3 million institutional;
• Q2 2023: $310.0 million from retail traders, $17.1 million institutional;
• Q3 2023: $274.5 million from retail traders, $14.1 million institutional.

Coinbase’s net loss for the third quarter was only $2.3 million — the closest the company’s come to making a profit in seven quarters. Total revenue was $674 million, up 14% on Q2. Total operating expenses were $1.1 billion, down 38% on Q2.

The bleeding was stemmed by a $82 million debt repurchase and a $50 million gain in “strategic investments,” said CFO Alesia Haas. In Q3 2022, the company posted a loss of $545 million on total sales of $590 million — just before FTX blew up.

Coinbase ended Q3 with $5.6 billion in cash and a pile of illiquid crypto assets that it accounted for as $483 million.

In the year to date, COIN stock is up 155% and currently trading at $85 — but that’s still a long way from its high of $342 back in the bubble days.

Analysts predicted even worse numbers for Coinbase than it achieved this quarter — so it mostly beat analyst estimates, just! [NASDAQ]

Banking the unbankable

What is going up is interest income. Holders put actual dollars into the USDC stablecoin and get zero interest on it — Coinbase and its partner Circle get all the interest on the USDC reserve.

USDC interest earned Coinbase $172 million in Q3 — up from $151 million in Q2. USDC reserves are mostly in short-term US government debt, and rising interest rates mean more income.

Interest on USDC is cheap revenue for Coinbase. Circle assumes all of the infrastructure-related costs, while Coinbase simply handles marketing.

The main worry is that USDC issuance is way down. The current market cap is 24 billion, down from 55 billion in mid-2022.

Regulatory clarity

The 10-Q and earnings call harped on “regulatory clarity.” What this means is that Coinbase wants special permission to do things that are presently just plain illegal.

We don’t like their chances. What Coinbase calls “The 2022 Events” have brought the regulatory heat — big time. Stated risk factors in the 10-Q include “adverse legal proceedings or regulatory enforcement actions, judgments, or settlements impacting cryptoeconomy participants.”  

As of June, Coinbase is also getting sued by the SEC for selling unregistered securities and running an exchange, a broker-dealer, and a clearinghouse as part of the same operation — and without registering any of these.

Armstrong’s plan is to put pressure on lawmakers and make them see the light. He hopes to get those “52 million” crypto holders in the US to spam Washington D.C. about the case and get them “to come out in force in this 2024 election, make their voice heard.”

We note that those “52 million” are not trading on Coinbase — we’re pretty sure they’re the bagholders stuck with altcoins and apes they can’t sell and may not be so keen to cheer on Coinbase.

If the SEC wins, Coinbase may have to stop trading in any cryptos other than CFTC-regulated commodity coins such as bitcoin. There isn’t enough volume in those for Coinbase to live on.

This is why Coinbase is so insistent on trading blatant unregistered securities  — it’s all they have left for a business model. 

If Coinbase can’t trade unregistered securities in the US — a very real possibility — it will have to rely on custody services and interest income from its stablecoin business. Since Circle runs the infrastructure, Coinbase’s only cost from USDC is marketing. Total marketing was $78 million for the quarter, though half of that was compensation.

The other ongoing legal issue is that multiple states have issued Coinbase show-cause orders, cease-and-desist letters, and fines over their staking products. In July 2023, Coinbase settled with California, New Jersey, South Carolina, and Wisconsin, and shut down staking there. In October 2023, they did the same in Maryland. But the 10-Q states: “The Company and Coinbase, Inc. dispute the claims of the state securities regulators and intend to vigorously defend against them.” OK.

Buddy, can you spare a satoshi

Coinbase needs to figure out new income streams. The company desperately needs to show that it’s profitable at an operating level and not just a black hole.

The earnings call hammered on Coinbase’s hopes that the SEC will finally approve a spot Bitcoin ETF, so Coinbase can charge custody fees. To date, the SEC has shot down every application for a spot bitcoin ETF put before it since 2017. But you can’t prove it won’t happen!

If ETFs do happen, they may hurt Coinbase’s transaction fee income — fees are way lower on ETFs than on Coinbase. Two analysts asked about this on the earnings call and Choi said Coinbase had no plans in place at all — except that ETFs would be super positive for crypto!

Coinbase is also spinning up offshore perpetual futures trading in the Bahamas. Offshore crypto futures could be a huge market if Coinbase can tap into what Binance is doing now and what FTX used to do. In between all the sanctions violations and criming, we mean.

Innovation!

Coinbase’s new tagline is “onchain is the new online.” Coinbase says it stands at the “forefront of this technology.”

Armstrong has the same vision he’s had for the past two quarters — “digital assets, broader access to financial services.” The miracle of onchain “even changes how we think about identity, governance, artwork, and non-financial services.” That is, all the stuff that crypto failed hard at for the past decade. But maybe this quarter it’ll work?

Coinbase’s current bet is Base, an in-house Layer 2 “payments solution” for Ethereum — that is, a completely centralized Ethereum sidechain to run Ethereum applications without Ethereum fees. So far, that means NFTs and scamcoins.

Armstrong also touted plans to put Coinbase itself onto Base — “one of our next major efforts is going to be how to integrate that into all of our products.” It’s not clear how any of that would work, but it should be a hoot.

Coinbase’s risks list in its 10-Q happens to mention that Base “has been in the past, and may in the future, be a target for scam tokens or other illegal activity. For example, in August 2023, a number of fraudulent tokens were identified and traded on Base blockchain.” It’s a pity that’s the use case.

What this means

Coinbase are screwed and they know it. There’s no hope for the greater glory of crypto any time soon. They need the stock price not to completely crater. Not being sued for number going down would probably be nice. And there’s insider stock sales to schedule. This 10-Q is a prayer for a miracle.