Coinbase earnings suggest strong year ahead, though challenges abound

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Coinbase on Feb. 15 issued its earnings report for the fourth quarter of 2023, and it’s clear the company is poised for a dominant role in the year ahead, thanks predominantly to Bitcoin (BTC) trading. Its technology expenses for 2023 were $1 billion lower than in 2022, and the company’s net income and earnings (EBITDA) are trending positive.

Until 2021, a large variety of crypto assets vied for (and received) investor attention on the company’s platform. Over the past two years, both consumer (retail) and institutional volumes have been shrinking while two dominant favorites emerged in the cryptocurrency space: Bitcoin and Ethereum (ETH), with the former ahead by some margin.

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Coinbase’s adjusted EBITDA, 2020-23. Source: Coinbase & Leverage Shares

Other cryptocurrencies remain an area of intense investor speculation as evidenced by the fact that they continue to contribute to nearly half of the company’s transaction revenues.

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Coinbase transaction and trading volumes, 2020-23. Source: Coinbase & Leverage Shares

Stablecoins also had a very encouraging start on the Coinbase platform. In a year where subscriptions and services accounted for nearly half of the company’s revenues, stablecoins alone accounted for 22%. 

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Coinbase net revenue and year-over-year change in revenue, 2020-23. Source: Coinbase & Leverage Shares

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.

Related: Low Bitcoin ETF fees could be bad news for Coinbase

Custodial fees are earned when cash balances maintained by customer accounts investing into cryptos are pooled and invested into U.S. Treasuries or money market funds as insurance. Year-on-year declining custodial fee growth trends is a sign that cryptocurrencies were losing traction among investors, which might be due to the fact that they aren’t easily convertible to (or “fungible with”) fiats without significant cost.

However, the bumper volume trends seen in the recently-launched Bitcoin ETFs this year indicates that there is a strong forward outlook cryptocurrencies as an investment. In most days since their launch, daily volumes in these ETFs have surpassed $1 billion. Given that Coinbase is custodian to eight of the 11 Bitcoin ETFs launched, it will likely witness a significant uptick as more and more investors buy into the ETFs. However, since these ETFs were approved and traded after Jan. 10, these won’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.

Related: 2024 will be the Ethereum network’s biggest year in history

Utility is likely one factor behind intense speculation around cryptocurrencies that aren’t Bitcoin or Ethereum. This speculation creates additional opportunities for the company. In May 2023, the company launched “International Markets” for select international customers wherein 15 perpetual futures contracts on different cryptocurrencies were being traded by over 100 institutions to generate approximately $10 billion in trading volume by the third quarter of 2023.

In November, Coinbase Financial Markets (CFM) began to platform regulated derivatives for consumption in the U.S. market. Now, 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.

The ‘Base’ platform

The company’s Base platform also went online in August. A layer-2 (L2) blockchain built on Ethereum , Base aims to help Coinbase customers efficiently convert their holdings to and from fiats (such as U.S. dollars) for real-world use.

In 2016, Coinbase CEO Brian Armstrong outlined in the company’s “Secret Master Plan,” where the company’s final phase aimed to enable the building of apps to facilitate everything from investing to loans and global remittances. Remittance alone is a target-rich environment: in a market where several hundreds of billions of dollars are transferred by foreign workers and global corporations on a yearly basis, it cost 6.2% on average to send $200 (with banks averaging at around 12.1%) as of the second quarter of 2023.

There is significant public utility for Base which, at the time of writing, is the fourth-largest L2 player by total value locked (TVL) in escrow on Ethereum, at $855 million.

With greater international market exposure, it’s possible that Coinbase’s customers could unlock significant benefits via a network of cryptocurrencies, stablecoins and apps interconnecting with central bank digital currency (CBDC) networks currently being run in Japan, India and China to then access (for instance) cheaper remittances 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.

Sandeep Rao is a senior quantitative researcher at Leverage Shares. He previously worked as a senior research associate for Nasdaq’s Index R&D Team. He holds an M.S. in finance and an MBA from the Illinois Institute of Technology.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.