The Coinbase (NASDAQ: COIN) exchange posted impressive profits in the first quarter of 2024 thanks to meme coins, an artificially inflated BTC, and one heck of an accounting tailwind.
Figures released on May 2 show Coinbase generated revenue of nearly $1.6 billion in the three months ending March 31, more than twice the sum generated in the same quarter last year and 75% higher than the Q4-2023 figure. Coinbase reported a net profit of nearly $1.17 billion, more than four times the profit reported in Q4-2023.
Despite these apparently stellar figures, Coinbase’s share price fell in after-hours trading Thursday and lost more ground on Friday. So what do investors know that the rest of us don’t?
Well, a closer look at Coinbase’s numbers reveals that the net income figure was goosed by around $737 million—63% of the total profit figure—by an accounting change that Coinbase took advantage of for the first time in Q1.
Last December, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2023-08, which granted ‘crypto’ companies the right to report the changes in ‘fair value’ of the digital assets they control.
Interestingly, Michael Saylor’s MicroStrategy (NASDAQ: MSTR) didn’t implement this accounting change when it reported its Q1 figures late last month, despite the company holding over 1% of the total supply of BTC. Saylor had also publicly lobbied for the FASB rule change, which would have provided a significant lift to MicroStrategy’s Q1 instead of the $53.1 million net loss the company reported.
It’s been suggested that Saylor is trying to avoid certain tax implications of the accounting switcheroo, including pushing MicroStrategy’s income above the point where the corporate alternative minimum tax of 15% would apply.
Whatever the reason, Coinbase didn’t see any value in delaying this boost to its bottom line, which suggests that Coinbase is far more sensitive to how it’s perceived by the markets than Saylor’s MicroStrategy.
Perhaps that’s because Coinbase’s business model is virtually unchanged from the past few years, during which the company booked seven straight quarters of net losses that resulted in a $2.6 billion annual loss in 2022. This means that Coinbase’s fate is inextricably linked to the overall digital currency market. When the market’s on a tear, Coinbase looks like geniuses. When the market’s in the tank, Coinbase’s follies are fully exposed.
Who did what
Digging deeper into Coinbase’s Q1, the company enjoyed significant rises in consumer ($935.2 million, +99.4% from Q4) and institutional transaction revenue ($85.4 million, +137%). The former was goosed by the recent memecoin bubble on Solana and BTC/ETH fiat value surges, while the latter got a rise from January’s launch of BTC spot-based exchange-traded funds (ETF), for most of which Coinbase serves as BTC custodian.
Retail trading volume nearly doubled from Q4 to Q1 to $56 billion, while institutional volume more than doubled to $256 billion. It’s worth remembering that these sums are wildly inflated by the recent surge in the value of the tokens being traded and not necessarily reflecting some new golden age of ‘crypto’ adoption.
For instance, Coinbase had 8 million monthly transacting users in Q1, a million more than in Q4, thanks in part to this spring’s ETF/halving hype-bubble. However, that Q1 figure was still 400,000 fewer than during Q1 2023, suggesting any pricking of this current bubble will further erode the number of customers willing to dip their toes into crypto’s fetid pool.
As for what traders were trading, ‘other crypto assets’ (aka utility-free memecoins) claimed the largest share at 43% (+1 from Q4) of total volume, BTC accounted for 33% (+2) and ETH slipped two points to 13%. Tether’s controversial USDT stablecoin claimed an 11% stake, down two points from Q4, but still far too high for a U.S.-based company like Coinbase that is already under regulatory assault.
In terms of transaction revenue, memecoins claimed a clear majority (55%, -2 points), while BTC rose by one point to 30%, and ETH gained two points to 15%.
Coinbase International, the Bermuda-based derivatives platform that launched one year ago, accounted for 17% of overall transaction revenue. Coinbase International handled $76 billion in notional volume during Q1, a significant jump from just $16 billion in Q4.
‘Other’ stuff
Coinbase announced a new ‘other transaction revenue’ subcategory in Q2, which added over $56 million to the total. This includes payment-related fees that were previously lumped in with consumer transaction revenue, but this ‘other’ segment’s growth came primarily from sequencer (transaction processing) fees on Base, the Ethereum layer-2 that launched last August.
Coinbase remains the sole entity tasked with processing Base transactions. Despite the company’s insistence that it will decentralize this process ‘over time,’ it has yet to offer any roadmap for when this monopoly might end. Given its apparent growing importance to Coinbase’s bottom line, our guess is that this decentralization mirage will continue to retreat on the horizon.
Coinbase’s overall ‘subscription and services’ revenue rose 36% to $511 million, led by a 15% rise in stablecoin revenue to $197.3 million. The growth comes thanks to recent increases in the market cap of USDC, with which Coinbase has partnered with issuer Circle.
Blockchain reward revenue surged nearly 57% to $150.9 million, buoyed by higher token values, which also helped custodial fee revenue jump 64% to $32.3 million. Interest and finance fee income gained 36% to $66.7 million and ‘other’ spiked 59% to $63.7 million.
Coinbase managed to keep a lid on its expenses during Q1, rising only 4.6% from Q4 to $877 million. Part of this economizing came from a drop in the millions Coinbase funneled into its political lobbying groups in Q4. But Coinbase still spent $242 million in stock-based compensation in Q1 and expects to dole out another $237 million of these perks in Q2.
Looking ahead to Q2, Coinbase is projecting between $525-$600 million in subscription and services revenue, but it declined to offer a transaction revenue forecast, saying only that it topped $300 million in April.
Legal woes mount
Coinbase remains locked in a bitter legal tussle with the U.S. Securities and Exchange Commission (SEC) over the exchange’s sale of what the SEC maintains are unregistered securities. That fight could get even nastier given the SEC is apparently preparing to declare ETH a security, potentially threatening both transaction and staking revenue, given ETH’s status as Coinbase’s largest asset available for staking.
Asked about the SEC’s plans on the post-earnings analyst call, Coinbase’s chief legal officer Paul Grewal continued to pin the company’s hopes on SEC chairman Gary Gensler’s
ethically-challenged predecessor Bill Hinman’s 2018 speech in which he expressed the opinion that ETH started out as a security but somehow made the transition to a commodity in the years following its launch.
Meanwhile, Coinbase was hit with a class action suit on May 3 on behalf of consumers who argue that the exchange duped them into buying unregistered securities. The plaintiffs further allege that Coinbase’s entire business model is illegal due to its failure to acquire a securities broker license. Coinbase responded by calling the suit “legally baseless.”
The suit echoes an earlier class action filed by a different group that was dismissed in February 2023. However, the suit was given new life last month when a federal appeals court partially reversed the lower court ruling. The appeals court found that Coinbase had materially changed its user agreements over time, and thus, the exchange couldn’t rely on language that directly contradicted what users had previously been told.
Specifically, Coinbase’s lawyers cited a user agreement that stated customers who buy tokens on the exchange “are not buying Digital Currency from Coinbase.” The suit notes that other user agreements in effect at the time stated the opposite, saying customers who bought tokens were indeed buying “from Coinbase.”
However, the appeals court upheld the lower court’s dismissal of the plaintiffs’ claim that Coinbase was required to reverse transactions conducted on the exchange. The appeals court found the plaintiffs hadn’t provided sufficient evidence of transaction-specific contracts to trigger that aspect of the Securities Exchange Act.
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