Subscriptions Can Curb Reliance on Trading Fees

Coinbase is seeking ways to maintain profitability despite slumping trading activity, with CEO Brian Armstrong expecting the crypto bear market to last up to 18 months — or even more.

In an interview with CNBC on Tuesday, Armstrong said his company was looking to long-term prospects rather than focusing on the short-term narrative in the markets.

“It’s never as good as it seems, it’s never as bad as it seems,” Armstrong told CNBC over questions on the macroeconomic outlook. “We try not to get focused on short-term ups and downs, we just zoom out.” 

Digital assets are nearing five months of price depreciation following a crash at the end of March. They’ve been dogged, along with equity markets, by significant macroeconomic factors including rising interest rates, inflation and the impact of war in Ukraine. 

While unemployment remains low, costs of goods have risen significantly over the last 18 months, with wage growth remaining flat in most developed economies, meaning less money in back pockets and reduced individual purchasing power.

“Crypto has had the double impact of credit defaults and a loss of confidence with the Celsius and Three Arrows Capital failures,” Jon de Wit, CIO of crypto trading firm Zerocap told Blockworks. 

“These conditions will no doubt test all crypto firms, but especially those that struggle to diversify revenue streams.”

Coinbase is hoping to weather the storm by undergoing cost-cutting measures and shifting the way it generates revenue, Armstrong said, which currently hinges on fees taken from trading activity when times are good.

Though in the periods where market activity slumps — exacerbated by decreasing digital asset valuations across the board — revenue dries up. Quarterly financial statements have shown the exchange giant has begun to slow in recent months.

That, in turn, has caused trouble for its stock price. Coinbase shares are down more than 70% in the year to date despite a healthy 60% boost inspired in part by a lucrative partnership with BlackRock announced earlier this month.

Coinbase revenue reflects drop in crypto trading

Coinbase reported $803 million in revenue during this year’s second quarter, missing analysts’ higher predictions by $50 million.

Indeed, the company’s valuation is somewhat correlated with bitcoin. In November, the stock hit its highest point since its direct listing as bitcoin hovered around its own record high.

Armstrong told CNBC that Coinbase had suffered similarly to its peers, with macroeconomic factors out of the company’s control. What it can affect, Armstrong said, were products, cost management, and ensuring it has enough capital to get through any down period.

“Coinbase stock is trading closely to crypto and we expect any market recoveries in the short-term to continue a high-beta correlation, de Wit said. He added that any longer-term accumulation would be a play on the exchange’s institutional, developer and Web3 products leading the market.

And the shakeup in diversified revenue streams couldn’t come soon enough.

Reported earnings show the exchange’s trading fee revenue fell 30% from the previous quarter, to $2.17 billion, as retail traders exited the market following the collapse of Terra and a lending crisis that sparked a liquidity crunch from overexposed crypto firms.

“One thing we’re doing is shifting more of our revenue over time, away from trading fees to what we call subscription and services,” Armstrong said, adding that those services grew to around an 18% share of the exchange’s total revenue.

While Armstrong remains upbeat about Coinbase’s profitability in the long-term, short-term headaches will need to be addressed if it is to reenergize investor trust and attract new customers.

“Coinbase was best positioned to generate profits in the last bull run,”  Jason Sheman, Director of Operations at Bitcoin.com told Blockworks.

“This market will correct, but immense competition from DEX’s will make it almost impossible to recreate that same success and the reason why they are trying to de-risk through subscription models,” Sheman said.

Staking and legal bouts

All this while Coinbase faces a myriad of legal headwinds. Coinbase last month confirmed the US Securities and Exchange Commission (SEC) was investigating the exchange’s listing process alongside its staking programs and other yield-bearing products.

Coinbase has denied it has anything to do with securities, but markets showed skepticism with COIN shares dropping 14% following initial word of the regulator’s probe.

If it came down to it, Armstrong told CNBC he would reduce Coinbase’s involvement in the staking market or even eliminate the activity entirely from its suite of offerings if they were pressured to do so.

Adding to mounting pressure, former Coinbase product manager Ishan Wahi faces charges of insider trading by the SEC related to a scheme that led to $1.1 million in profits between June 2021 and April 2022.

Still, Coinbase has had to refocus its efforts to reduce costs including shrinking its workforce by 18% in June as it braced for a “crypto winter” and a recession in traditional markets.

The exchange doesn’t stand alone. Several others having been forced to cut costs and reduce staff numbers.

But the uncertainty in the short-term means the exchange needs to shift its business model dramatically and find new ways to generate revenue, something Armstrong seems prepared to do.

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