Analysts Seek Details on New Revenue Streams

After three quarters of disappointing earnings in 2022 for Coinbase, analysts are parsing how well the crypto exchange has diversified its business lines away from trading spreads. 

The Street, industry participants told Blockworks, is paying particular attention to Coinbase’s forays into derivative and staking products ahead of the exchange’s third-quarter earnings Thursday. The focus — shying away from the traditional metrics of active users and spot trading flows — reflects the company’s long-awaited move to complement revenue derived from shrinking spreads on crypto trades. 

Coinbase had a tough second quarter, with trading volumes and transaction revenue down 30% and 35%, respectively, from the first quarter. The company said in its August shareholder letter that crypto’s market capitalization declined by $1.3 trillion, or roughly 60%, between April and June.  

Lower trading volumes of $217 billion — down from $309 billion in the first quarter — was a major driver of a 31% revenue decline last quarter, as Coinbase’s net losses totaled $1.1 billion.

This quarter, financial services firm Piper Sandler estimates Coinbase’s revenues to fall 21% to roughly $640 million, in part due to lower transactions. The company expects the exchange’s net loss to be $540 million — about half of the second quarter decline — however, Coinbase slashed its expenses during the quarter by about 30%.

The company said in June it was set to cut about 18% of its workforce, joining a number of prominent industry players. 

“It’s a balance where they have to be aware of their trajectory and cash flow, and they have reduced a lot of expenses,” Piper Sandler Senior Research Analyst Richard Repetto told Blockworks. “On the other hand, they’re a growth company, so you want to see the foundation to grow as well if the market and crypto trading comes back stronger and if crypto adoption increases.”

Diversifying the business

Mark Palmer, a managing director and fintech analyst at BTIG, said the lack of crypto volatility in the third quarter, relative to the prior quarter, means Coinbase will likely report lower monthly transacting users.

“Volatility is the friend of exchanges as it pertains to volumes,” Palmer told Blockworks. “We did see the general volatility that is associated with crypto being correlated with risk assets in general, but we didn’t see…entire protocols collapse and centralized trading platforms follow, which translated into fear, and, hence, volatility.”

Owen Lau, an executive director at Oppenheimer, said he expects the revenue percentage from Coinbase’s subscription and services segment — representing non-transaction revenues — to increase from 18% to 28% quarter over quarter. This increase will in part offset lower transaction revenues due to a decrease in transaction volumes of about 30%. 

The combination of low crypto prices and less volatility during the three-month period is set to translate into a “rough quarter,” for Coinbase, Palmer said — though he, too, is looking for details on the exchange’s newer business lines. 

“[Coinbase] can’t control the wind, but it can set its sails,” he said. “The market is going to be the market…But that doesn’t mean that the company doesn’t have a great many strategic decisions that can influence its position, not only in the quarter, but in the long term.”

Derivatives will be an important business segment for Coinbase as the institutional market for digital assets continues to grow, Palmer said. 

Coinbase acquired FairX earlier this year to enter derivatives markets. It launched bitcoin nano-futures in June and nano ether futures in August. The company is awaiting its license to offer futures directly to customers.

Palmer said he is also seeking commentary on Coinbase’s call around the traction the company has had on the staking front, particularly after Ethereum’s move from proof-of-work to proof-of-stake.

About two-thirds, or 6 million, of Coinbase’s active monthly traders transacted with non-investment products during the second quarter. Driving the trend: The market maker began to support staking for Cardano in March and Solana in June, it added.

“Coinbase is very well positioned to be a beneficiary of increased adoption of staking, particularly by institutions,” Palmer said. “Now it has those offerings in place, so the question is, ‘What kind of traction are they gaining? And where do they see that going forward?”

On the pursuit of profitability

Coinbase’s stock price was down roughly 74% year to date, as of Tuesday mid-day. The number is slightly worse than the drop in asset prices for bitcoin and ether since hitting all-time highs last November.

Though many crypto companies have shown high correlation to bitcoin prices, some investors still use profitability as a key metric, according to Lau.

“The important thing is if you become — or come back to — profitability, I think the market will recognize that and give them credit,” he said. 

Lau added that he expects Coinbase’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) to come in at a loss of $228 million in the third quarter, up from a drop of $151 million the prior quarter. Lau said he expects pared losses starting in the first quarter of 2023. 

Piper Sandler Senior Research Analyst Richard Repetto said he, too, would be watching to see whether Coinbase can reach a breakeven point with adjusted EBITDA by the end of the year. 

“And then anything that says that we’ve sort of bottomed in the crypto pullback, what they’re seeing in regards to engagement levels and where we are in the crypto winter,” Repetto said.

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