Coinbase posted a double miss in Q2 with revenue growth of just 3.3% YoY, with both transaction revenue and trading volumes both underperforming the spot market in the quarter.
Despite the soft growth, especially in transaction revenues, Coinbase made significant progress on multiple fronts in the crypto world. This included bringing USDC on Base Chain live in Shopify Payments, launching the Coinbase One Card, reaching all-time high average market share of assets on its custody platform, and significantly expanding its derivatives presence. In addition, Coinbase will be positioned at the center of bringing equities on-chain. There were many interesting discussions about the vision for the company in the earnings call, as noted below.
Coinbase continues to stand out for its large cash reserves of $9.3 billion in total USD resources of which $1.8 billion is in a crypto investment portfolio. It’s also important to zoom-out and look at the bigger picture as Assets Under Custody (AUC) share reached an all-time high of total crypto asset market cap at $245.7 billion AUC due to strong inflows from ETFs and Corporate purchases. Coinbase also shared they are the custodian for over 80% of U.S. BTC and ETH ETF assets as of the end of Q2
As we’ve discussed in the past, earnings reports matter very little for this company compared to technicals. With crypto, our style is to have predefined price targets given this asset class is sentiment driven.
Revenue Growth Flatlines in Q2
Coinbase reported 3.3% YoY revenue growth to $1.49 billion in Q2, missing estimates for 9.9% growth to $1.59 billion. Q2 saw a more challenging crypto market backdrop, with spot volumes down (31%) QoQ globally and (32%) QoQ in the US, while volatility declined (16%) QoQ.
While this a sharp deceleration from Q4 and even Q1, this type of volatility is not out of the ordinary for the crypto industry. For example, Q3 revenue growth is currently expected to rebound to 40.2% YoY, with the spot market rebounding substantially MoM in July.
Key Metrics
Trading Volume
Coinbase’s trading volume underperformed the spot market by more than 8 points, declining (40%) QoQ to $237 billion; however, trading volumes were still up 5% YoY. Coinbase said that its QoQ underperformance was primarily driven by “lower stablecoin pair Trading Volume driven by an intentional pricing change we made in March as we evolved our stablecoin strategy.”
Consumer trading volume increased 17% YoY but declined (45%) QoQ to $43 billion, while Institutional trading volume increased 3% YoY but declined (38%) QoQ to $194 billion.
Coinbase noted that Bitcoin accounted for 30% of trading volume in the quarter, up from 27% in Q1, though growth in trading volume was most notable in altcoin/other assets, which rose from 38% in Q1 to 55% in Q2.
Transaction Revenue
Transaction revenue matched the decline in trading volumes, down (39%) QoQ to $764.3 million; however, revenues were down (2%) YoY, weighed down by the Institutional side.
Consumer transaction revenue decreased (41%) QoQ and (2%) YoY to $649.9 million, as the stablecoin pricing change “disproportionately affected Advanced platform volumes where most of that activity was taking place.” Institutional transaction revenue declined (35%) QoQ and (4%) YoY to $60.8 million. Bitcoin accounted for 34% of transaction revenue, up from 26% in Q1, while altcoins/other crypto accounted for 41%, an interesting disparity to their volume share indicating lower fee rates.
Other transaction revenue declined (21%) QoQ but rose 2% YoY to $53.5 million, although average revenue per transactions on Base Chain “decreased meaningfully.”
Subscription and Services Revenue
Subscription and services revenue was $655.8 million, up just 9.5% YoY but above the $640 million midpoint of its guidance. Coinbase said this was driven by “continued growth in average USDC balances, native units staked, and all-time high average Prime Financing balances.”
For Q3, Coinbase is projecting Subscription and services revenue between $665 to $745 million, or rebounding to 26.8% YoY at midpoint. This is expected to be driven by higher average crypto prices, such as ETH being up 45% quarter-to-date and SOL being up 14%, as well as growth in stablecoin revenue from USDC market cap reaching an all-time high in July.
Within Subscription and services revenue:
- Stablecoin revenue rose 38% YoY and 12% QoQ to $338.5 million, driven by a 13% QoQ increases in USDC balances held in Coinbase products to $13.8 billion and off-platform USDC balances to $47.4 billion.
- Blockchain rewards revenue declined (22%) YoY and (26%) QoQ to $144.5 million, as staking inflows were more than offset by lower average prices of both ETH and SOL and lower protocol rewards rates.
- Interest and finance fee income declined (15%) YoY and (6%) QoQ to $59.3 million, as lower interest income on custodial fiat more than offset a QoQ increase in Prime financing
- Other subscription and services revenue rose 15% YoY but declined (15%) QoQ, as lower blended fee rates driven by customer mix and lower non-BTC asset prices offset custodial fee revenue.
Margins
Operating margin dipped into the negatives this quarter, while GAAP net margin was >95% as Coinbase benefited from a significant $1.5 billion gain on strategic investments and a $362 million gain on crypto investments. Adjusted net margin, which was initiated last quarter and excludes those impacts, was razor thin at just 2.2%.
- GAAP operating margin was (1.6%), down from a 34.7% margin in Q1. This was the first quarter with a negative operating margin since Q3 2023.
- GAAP net margin was 95.5%, due to the aforementioned gains on investments.
- Adjusted net margin was 2.2%, down from a 25.9% margin in Q1.
EPS and Adjusted EBITDA
Due to these wild disparities in GAAP and adjusted net margin, Coinbase’s GAAP and adjusted EPS figures are on the opposite end of the spectrum. GAAP EPS was $5.14, beating estimates for $1.51 by more than 240%. However, adjusted EPS was $0.12, missing the $1.49 estimate by (92%).
Adjusted EBITDA was $512.1 million for a 34.2% margin, down from a 45.7% margin in Q1 and a 41.1% margin in the year ago quarter.
Cash and Balance Sheet
Cash flows rebounded to positive territory this quarter, while Coinbase’s liquidity profile remains strong.
- Operating cash flow was $328.5 million for a 21.9% margin, rebounding from a (9%) margin in Q1. However, this remained lower than the 33.4% margin from Q2 2024.
- Cash and equivalents totaled $7.54 billion, with Coinbase noting it had a total liquidity profile of $9.32 billion when including its net USDC balance of $1.78 billion. Debt remained steady at $4.24 billion.
Q3 Outlook
Coinbase said that it anticipates July transaction revenue to be approximately $360 million, with data from The Block showing spot market volumes rebounding more than 55% MoM.
Coinbase guided for $665 to $745 million in subscription and services revenue, up 26.8% YoY at midpoint. Transaction expenses are expected to be mid-teens percentage of net revenue, while tech, development and G&A expenses are expected to be $800 to $850 million. Sales and marketing expenses were guided at $190 to $290 million, though Coinbase noted that it sees opportunities to continue investing in marketing in Q3.
Earnings Q&A:
Expanding the Crypto Empire
Of the many ways that Coinbase expanded its empire recently, two areas stand out the most – the Everything Exchange and perpetual futures and options.
Everything Exchange & Base App – – Favorable Legislation Announced Today
In the earnings call, Coinbase management announced their new everything exchange, which will effectively expand their trading platform to also include tokenized stocks and real-world assets. We recently covered Robinhood’s similar efforts to expand to include equity tokens and perpetual crypto futures.
Regarding tokenized equities, Coinbase stated the “total addressable market for this is massive” and that capturing just 3% of equities would double the current crypto market.
Coinbase's announcement of its everything exchange followed the SECs announcement today of “Project Crypto” which aims to bring the financial markets on-chain. This paves the way for companies like Coinbase to have a single license rather than a conflicting mess of licensing across states. Prior to Project Crypto, Coinbase and others were not able to launch super apps like WeChat and AliPay.
In anticipation of this announcement, Coinbase launched its super app called Base app. Base app aims to combine a wallet, trading and payment features, plus social media and messaging features into one app. The app rolled out with an identity verification system and a one-click checkout feature for USDC with partners such as Shopify.
Here is what was stated in the call in terms of the super app’s current user base:
“We now have a scalable blockchain with Base. There's decentralized messaging protocols, ways for people to build applications, and decentralized social media protocols.
So this is kind of a super app that we've put out there. It's in beta. There's actually 700,000 people on the wait list already. And so there's been a ton of demand for it and excitement about it.”
In addition to the Base app, Coinbase also announced this quarter a credit card that will earn between 2% to 4% back in Bitcoin for every purchase.
Perpetual Futures and Options:
Last quarter, we covered the acquisition of Deribit which was a major piece to Coinbase’s strategy to pull together spot, future and options trading onto one global platform. Deribit saw over $30 billion in open interest last year and $1 trillion in trading volume outside the of the United States, representing 75% market share. This acquisition makes Coinbase the #1 crypto derivative platform globally by open interest.
This quarter, Coinbase launched 24/7 trading of Bitcoin and Ethereum contracts, with management stating: “we launched perpetual style futures in the United States, which hit an all-time high in trading volume this week.”
Double-clicking on Stablecoins and the Shopify Announcement:
Despite there being many new announcements this quarter, stablecoins remains the largest opportunity for Coinbase in the near-term. Last year, stablecoins processed $30 trillion in settlements last year for 300% growth with management stating on the call its now a $40 trillion opportunity.
To participate, Coinbase launched a full-stack stablecoin payment solution for commerce platforms. The out-of-the-box infrastructure allows merchants to accept USDC payments even with little to no experience in developing crypto solutions. When compared to credit cards, USDC offers similarly fast settlement but with lower fees and is global.
Shopify was a launch partner as USDC is pegged 1:1 to the dollar which removes the unpredictable nature of other cryptocurrencies for merchants who want to accept crypto. As stated, the global transaction can settle quickly and for less cost than credit cards. For example, the Base Layer 2 can settle in 1 second for $0.01.
Interesting enough, Coinbase stated the much larger opportunity is B2B payments, representing 75% of cross-border payments – so something more along the lines of wire transfers and ACH payments : “One of the biggest areas that we're focused on first is really around B2B payments. A lot of this is cross-border. We think that actually cross-border payments is about a $40 trillion opportunity. B2B is 75% of that.”
Back-end infrastructure for Crypto:
Just as Amazon Web Services (AWS) offers backend infrastructure for the internet economy, Coinbase CaaS provides backend crypto infrastructure for banks, fintechs, and enterprises. The company has 240 institutions including newly announced PNC, JP Morgan, eToro, Revolut and Webull. Coinbase infrastructur or “rails” can be used for can be used for settlement, tokenization, on-chain payments and other crypto infrastructure needs where developing your own blockchain would not make sense (which is most of the time).
Conclusion:
The market will find reasons to sell Coinbase from time to time, yet it’s not too hard to envision Coinbase as the largest disruptor to traditional finance globally. Nearly every outdated facet of the financial sector is set to transform and Coinbase is positioned to play a central role. Although it would be easy to categorize Coinbase as a crypto exchange, it is transforming into something much more meaningful.
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Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in “COIN” at the time of writing and may own stocks pictured in the charts.
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