The Coinbase (NASDAQ: COIN) exchange has turned its first profit in two years, thanks to surging alt-coins and exchange-traded fund (ETF) hype.
Figures released on Thursday show Coinbase generated net revenue of $904.6 million in the final three months of 2023, a nearly 50% improvement over Q4 2022 and 45% higher than Q3 2023. The surge allowed Coinbase to turn a profit of $273 million versus the $557 million loss one year earlier and marks the first time the company finished in the black since Q4 2021, the year it listed on the Nasdaq exchange.
There are some caveats here, as the profit figure was boosted by a $121 million non-cash tax valuation allowance release as well as an $18 million gain from its 2023 debt repurchase scheme. Another $52 million came from gains on the sale of certain digital assets used for operations.
Regardless, the Q4 surge allowed Coinbase to finish 2023 with a full-year profit of $95 million, a significant reversal from its $2.62 billion loss in 2022. Much of that bottom-line improvement had to do with Coinbase cutting nearly one-quarter of its workforce last year.
Transaction revenue drove the Q4 gains, with both consumer ($492.5 million, +79% from Q3) and institutional ($36.7 million, +160%) transactions coming in hot. Consumer trading volume went from $11 billion in Q3 to $29 billion in Q4, while institutions nearly doubled their volume to $125 billion (bear in mind that this surge also reflects the rise in the tokens being traded).
The increased volume reflects not only December’s BTC spot-based ETF pre-approval hype-cycle but also the value bubble that engulfed so-called ‘alt-coins’ like Solana and
DOGE. This ‘other crypto assets’ segment saw volume rise from 28% of Coinbase’s pie in Q3 to 42% in Q4, only slightly off its Q123 peak of 45%.
Meanwhile, BTC’s slice slipped seven points to 31%, and ETH dipped four points to 15%. The quarter also saw Coinbase slightly reduce its exposure to the controversial Tether (USDT)
stablecoin, which slipped two points from Q3 to 13%.
Altcoins’ share of overall transaction revenue was even stronger, accounting for 57%, some 13 points higher than Q3. BTC’s revenue share fell eight points to 29%, and ETH fell five points to 13%.
Revenue rises despite shrinking customer base
Coinbase’s‘ subscription and services’ bucket saw its revenue gain 12.2% to $375.4 million. The bulk of this came from the ‘stablecoin revenue’ segment, which slipped less than 1% to $171.6 million. Coinbase said the flat figure was in part due to a full quarter under its revised deal with Circle, minter of the USDC stablecoin.
Revenue was also impacted by USDC’s market cap steadily shrinking during Q4 to barely above $24 million by December. However, USDC has added around $4 billion to that total since 2024’s speculative frenzy began in earnest, and Coinbase said it finished 2023 with $2.8 billion worth of USDC on its platform, $300 million more than at the end of Q3.
The rest of this subscription+ bucket was all broadly positive, with blockchain rewards revenue jumping nearly 28% to $95.1 million, interest income rising nearly 8% to $42.6 million, custodial fee revenue up one-quarter to $19.7 million, and ‘other subscription and services revenue’ surging 44% to $46.5 million. (Corporate interest and other income added $49.2 million.)
It’s quite the turnaround from Q3, during which rewards, interest, and custodial revenue were all down sharply from Q2. The resurgence of transaction revenue also helped reverse the multi-year trend that saw ‘subscription and services’ revenue taking an ever-larger slice of the overall.
Despite the rosy revenue, Coinbase finished the year with seven million monthly transacting users (MTUs), down from 8.3 million at the end of 2022. Coinbase claims 800,000 of these missing transactors were digital asset stakers who declined to opt-in when Coinbase updated its terms of service, while another 400,000 were simply traders who evidently wanted nothing more to do with ‘crypto’ last year.
And that has some analysts worried about Coinbase’s 2024 outlook. The past two years have shown how utterly dependent Coinbase is on prevailing market sentiment. No one knows how big the current bubble will get or how long it will last. Will those who got burned during the last crash succumb to a fresh round of FOMO, or have they had enough for one lifetime?
According to Coinbase, it generated $320 million in transaction revenue from January 1 through February 13, putting it on pace to blow past its Q4 figures. Subscription and services revenue is projected to come in between $410-480 million in Q1, also a significant improvement over Q4, although Coinbase cautioned that ‘crypto’ is one nutty business, so who knows what will happen before the quarter is through.
Back in the here and now, Coinbase shares closed Thursday up 3.3% to $165.67 and rose by an additional 14% in after-hours trading.
The call
Coinbase acts as custodian for 8 of the 11 BTC ETFs that were approved to launch on January 11. While excitement around these products has been cited as contributing to the current BTC value bubble, analysts have suggested that Coinbase’s ETF custody revenue might not compensate for retail customers who choose to buy into ETFs—which currently charge microscopic fees—rather than pay Coinbase’s larger transaction fees.
Speaking on Thursday’s analyst call, Coinbase CEO Brian Armstrong insisted that this wouldn’t be the case, calling ETFs “a net positive” that’s bringing new customers into the ecosystem. Asked whether the ETF competition might convince Coinbase to lower its fees, even temporarily, CFO Alicia Haas said that wasn’t in the cards.
As for Coinbase International, the Bermuda-based derivatives platform that launched last spring, Armstrong said it did $16 billion in notional volume in Q4, up from $10 billion in Q3. While cautioning that the product is still in its infancy, Armstrong said the platform did $700 million in a single day during the current quarter, thanks to adding features like 10x leverage.
One analyst noted that Coinbase’s marketing spend was ‘flat-ish’ into Q1 and wondered if they didn’t want to “lean in a little more” to catch the current wave. Haas said the company believes it “hit our stride” with its marketing in 2023 and now is the time to redirect some of that spending elsewhere. Coinbase’s COO Emilie Choi added that one area they do expect to spend more is “policy marketing.” Read on…
Attack!
Coinbase could have posted an even larger profit had its expenses not risen 11% to $838.2 million. Much of this was due to ‘other operating expenses’ rising 15x to $54 million in Q4. Coinbase said this jump was “primarily driven by political contributions in support of driving regulatory clarity by electing pro-crypto candidates in the U.S. elections this year.”
Coinbase and Circle—along with Andreessen Horowitz (a16z), Kraken, Ripple Labs, Blockchain Capital, the Winklevii, and a handful of tech VCs—are key members of Fairshake, a new pro-crypto super PAC. Bloomberg recently reported that of the roughly $85 million that Fairshake has raised to date, Coinbase contributed $24.5 million (plus another million from Armstrong), while Ripple and a16z contributed $20 million apiece.
Fairshake has to date spent only a small slice of its cash on donations to crypto-friendly pols as Rep. Patrick McHenry (R-NC) and Rep. Tom Emmer (R-MN). But this week saw Fairshake splash out millions on a campaign to defeat Rep. Katie Porter (D-CA), who’s looking to assume the Senate seat left vacant by the late Sen. Dianne Feinstein.
It’s unclear why Porter is first in Fairshake’s sights, as she currently has a ‘N/A’ rating on Coinbase’s Stand With Crypto political advocacy site (although two years ago, she criticized BTC miners’ energy consumption).
Meanwhile, Porter’s rival for Feinstein’s open seat, Rep. Adam Schiff, has an ‘A’ rating from Stand With Crypto, apparently based on a single statement on February 1 that suggested doing what it takes to keep tech jobs in California.
The Fairshake video accuses Porter of lying about not taking “corporate PAC money” while “taking campaign cash directly from Big Pharma.” As proof, the ad cites three contributions to Porter from three pharmaceutical execs totaling a whopping $5,400. The video also claims Porter received over $100,000 from Big Oil and Big Bank execs, which we can’t help but notice is a pittance of what Big Crypto is spending to get this message across.
Porter is fundraising off of the “flat-out false” and “misleading” Fairshake spot, saying she was being targeted by “special interests and their ultra-wealthy backers.” (The ad received a ‘mostly false’ rating from the Sacramento Bee.) The Progressive Change Campaign Committee chimed in, saying the ‘Big Crypto’ ad was proof that “billionaire special interests” are scared of “a pro-consumer champion like Katie Porter.”
Welcome to Dumpsville
Coinbase showed some rare restraint in its stock-based compensation for execs in Q4, giving away $164 million, down from $219 million in Q3. For the year as a whole, Coinbase doled out $865 million to its team.
That figure would have been even higher were it not for the fact that Coinbase’s share price spent most of 2023 in the toilet, which “introduced risk to our financials” due to the gaps between the dates that equity awards are approved and when they’re recorded as an expense. But fear not; Coinbase has now aligned this process, which in 2024 will lead to “higher stock-based compensation on a total dollar basis compared to 2023.”
Interestingly, the’ shareholder question’ section of the earnings call—in which Coinbase management selectively answers questions that allow them to get some desired message across—started with why Coinbase insiders keep dumping millions of their shares if they’re so bullish on the company’s future.
Case in point; recent weeks saw Armstrong sell another $9.5 million, pushing his year-to-date total to around $13m. Both Choi and legal eagle Paul Grewal sold another $1.2 million apiece, while co-founder Fred Ehrsam III dumped nearly $66 million in January plus another $11.9 million so far in February, pushing his total sales since the end of November 2023 to over $150 million.
CFO Haas reassured shareholders that all Coinbase insiders “share the long-term conviction” that the exchange’s future is bright. Besides, equity is a “significant component of compensation,” and share sales account for a small portion of insiders’ total holdings. Haas claimed no one is selling based on the shares’ day-to-day price, that it’s all set up in advance, and when certain thresholds are met, sales are triggered.
Well, someone was definitely triggered.
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