Coinbase, a major US cryptocurrency exchange, released its second quarter results on August 3rd. Despite reporting a net loss, there were some positives, including a 13% quarter-on-quarter cut in operating expenses and a 3% increase in cash reserves to $5.5 billion.
However, the exchanges posted a net loss of $97 million, worse than the previous quarter, and their adjusted EBITDA fell 32% to $194 million in the second quarter.
Services and USDC Stablecoin Affect Growth
One of the downsides was a 7% drop in revenue from subscriptions and services compared to the first quarter. The letter to shareholders states that this was partly due to a 28 percent decline in the market capitalization of the USDC stablecoin. Since Coinbase has a stake in Circle, the USDC issuer, it benefits from the interest rate offered by stablecoin reserves.
In addition, fiat customer balances deposited on exchanges serve as another source of income. But despite this, Coinbase’s interest income fell 16% quarter-on-quarter to $201 million in the second quarter.
However, the numbers suggest that Coinbase has managed to reduce its reliance on trading fees. Subscription and services revenue caught up with trading revenue in the first half of 2023, which is a more noticeable change considering transaction costs make up about 15% of its revenue. This suggests that Coinbase has evolved from a trading company to a service broker, prioritizing recurring earnings.
Looking at the price of Coinbase (COIN) shares, there are no clear signs of such a shift in focus until 2023. This suggests that either investors continue to firmly believe that trading fees will remain the company’s main source of income, or they simply haven’t been grinding the numbers as hard as they should.
It is impossible to accurately predict the direction the cryptocurrency market will take in the coming years, but one can appreciate the potential for Coinbase to increase its services and subscription revenue, no matter what the trading fees will be. There are several notable developments on the horizon that could significantly reduce the dependence of exchanges on trading.
Events on the horizon that could significantly reduce exchanges’ dependence on trading
First, Tether, the largest stablecoin by market capitalization, ends up being prosecuted by the Department of Justice and losing its banking partnerships. If the Department of Justice (DOJ) sues the Tether issuing company and therefore loses its banking partnership, it could suffer a significant loss in market capitalization. This scenario could create an excellent opportunity for the USDC to step in and fill the gap. Since Coinbase is receiving revenue from Circle, the USDC issuer, such a shock could quadruple Coinbase’s service revenue.
Second, Binance may be shut down by regulators. Despite its position as the current champion of cryptocurrency exchanges in terms of trading volume, Binance is attracting the attention of regulators around the world, and not very good ones. If regulatory pressure leads to an effective shutdown of Binance, it could open the way for Coinbase to gain significant market share. The domino effect is likely to be a significant increase in revenue from Coinbase services.
Third, the potential launch of spot Bitcoin ETFs in the United States could be a game changer for Coinbase. The firm has already entered into joint supervision agreements with ETF issuers and is ready to provide custodial services. This new path will create an additional source of income for Coinbase.
Finally, it is important to remember that while Coinbase is currently focused on cryptocurrency trading and custody services, the company has 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 can generate significant service and subscription revenue.
The plan is being followed, but only time will tell if this is a winning strategy.
The volatility of the cryptocurrency landscape is clouding judgment as to whether Coinbase’s pivot to non-trading revenues is the right move. But signs show that Coinbase is agile and adaptable, cutting costs and strengthening its treasury. They were able to match subscription revenue with trading revenue, which is a clear indication of this adaptability.
However, the trillion dollar question is whether investors will recognize and reward this change in income generation. At present, it seems that investors are not paying enough attention to Coinbase’s strategic upgrade, but if some of the above scenarios come true, they could be in for a pleasant surprise. This is a dynamic space and this crypto giant seems to be playing his cards strategically.
This article is for general informational purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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