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.  

Near-term volatility is showing up in the technicals. We will alert you when risk favors accumulating again. Please join Knox every Thursday in his 4:30 p.m. EST webinar where he reviews buy/sell plans for crypto positions including Coinbase. To subscribe to Advanced with $100 off, please click here to email us or email premium@io-fund.com and mention code ADVANCED100.click here to email us or email premium@io-fund.com and mention code ADVANCED100.

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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Coinbase reported a soft Q1, with revenue missing estimates by 3.1% as trading volumes declined (13%) sequentially. Subscription revenue also came in at the low end of guidance in the quarter, with Coinbase forecasting subscription revenue to fall sequentially in Q2.  

Where Coinbase stands apart is its cash of $8.05B, which allows the company to execute on an aggressive M&A strategy. Earlier in the day, Coinbase announced the largest crypto acquisition in history of $2.9 billion for Deribit, a Bitcoin and Ethereum options platform. This move expands Coinbase’s derivatives presence, as Deribit’s 2024 trading volumes nearly doubled YoY to $1.2 trillion. For comparison, Coinbase drove more than $800 billion in derivates trading volume in Q1. The deal was also at a large discount from previous reports in January, where it was expected to command a $4-5 billion price tag. 

Adjusted EBITDA margin was 45.7% with $930 million in adjusted EBITDA profits and $527 million in adjusted net profit, which helps to illustrate the rare, quality fundamentals that Coinbase offers in the crypto sector.  

Looking forward, April is tracking lower than expected with transaction revenue of $240 million, down 12% month-over-month in April compared to global spot transactions down 13% MoM. 

As we’ve pointed out in the past, Coinbase is largely dependent on volatility and asset prices, and is not tied as much to the results of an earnings report. 

Revenue 

Coinbase reported 24.2% growth in revenue to $2.03 billion in Q1, missing estimates by 3.1%. Despite increased crypto volatility and Bitcoin’s new all-time high in January, crypto market cap declined (19%) QoQ and industry trading volumes dropped (13%) QoQ, weighing on growth. Coinbase outperformed the broader industry as its spot trading volume declined just over (10%) QoQ to $393.1 billion. Derivatives trading volume was $803.6 billion in Q1.  

Q1’s revenue growth slowed dramatically from Q4’2 138% rate, though this type of volatility is not unusual for the crypto industry. Q2 is currently expected to see revenue rebound slightly to 29.6% YoY.

Key Metrics 

Trading Volume 

Trading volume rose 26% YoY but declined (10%) QoQ to $393.1 billion, with institutional trading volume remaining steadier in the quarter.  

Institutional trading volume declined just (9%) QoQ but remained 23% higher YoY at $315 billion. Consumer trading volume declined (17%) QoQ but was 37% higher YoY at $78 billion. According to Coin Gecko, spot trading volume on centralized exchanges was down (16.3%) QoQ which is aligned with what CB saw on the consumer side, mainly driven by Ethereum and Solana, which saw steeper losses than Bitcoin in Q1. 

Transaction Revenue 

Transaction revenues declined more than trading volumes in the quarter, with Coinbase pointing out a few factors impacting growth on the institutional side. Coinbase’s global transaction revenue rose 17% YoY but declined (19%) QoQ to $1.26 billion. 

Consumer transaction revenue matched corporate growth rates at 17% YoY and (19%) QoQ, with revenue of $1.10 billion in Q1. Institutional transaction revenue grew slower, at 16% YoY and (30%) QoQ to $99 million.  

Coinbase said that trading volumes in the quarter were “more concentrated among market makers and liquidity providers which tend to have lower fee rates,” while derivatives also weighed on growth. Coinbase is prioritizing building its derivatives business via trading rebates and incentives to boost liquidity, thereby offsetting fees from trading.  

Regarding the disconnect between institutional volume down (9%) and institutional revenue down (30%) QoQ, the CFO stated: “There are 2 factors which drove the discrepancy between the revenue decline and the volume decline. The first is the growth in our derivatives trading business. As we build this business, we are offering trading rebates and incentives to build liquidity and acquire customers. Our focus on growth is causing a decline in the transaction revenue that we get from derivatives trading as these are contra revenue and recorded in the institutional transaction revenue line item.” 

Other transaction revenue was flat QoQ at $68 million in Q1. Transactions on Base rose 16% QoQ, though the average revenue per transaction decreased 21% QoQ. 

Subscription and Services Revenue 

Subscription and Services revenue came in at the lower end of Coinbase’s guided range in the quarter, with management saying lower blockchain rewards revenue partially offset stablecoin and Coinbase One revenue.  

Revenue was $698.1 million, versus its guide for $685-765 million. Growth was 36.6% YoY, decelerating from 70.8% YoY in Q4, yet is forecasting to decelerate to the mid-single digits in Q2. 

For Q2, Coinbase projected Subscription and Services revenue between $600 and $680 million, for YoY growth of just 6.8% at midpoint, a 30 point sequential deceleration. Even at the upper end of Coinbase’s guide, revenue growth would be just 13.5% YoY. Coinbase said the forecast anticipates blockchain rewards revenue to more than offset stablecoin revenue growth. 

Within Subscription and Services revenue: 

• Stablecoin revenue rose 50.8% YoY and 32% QoQ to $297.5 million. Coinbase said that average USDC held across Coinbase products increased 49% QoQ to $12.3 billion on better USDC integration on its platform.  
• Blockchain rewards revenue increased 30.3% YoY but decreased (9%) QoQ to $196.6 million, weighed down by lower average crypto prices in Q1, primarily Ethereum and Solana. 
• Interest and finance fee income decreased (5.4%) YoY and (4%) QoQ to $63.1 million, as higher balances were partially offset by lower rates. Coinbase added that  Prime Financing revenue declined as loan balances declined with customers deleveraging due to volatility, though onboarded clients rose double-digits QoQ. 
• Other subscription and services revenue rose 5% QoQ to $141 million. Coinbase announced that it has now grouped Custodial Fee revenue in this sub-segment.  

Margins 

Operating margin shrunk more than 10 points on a YoY and QoQ basis, while net margin fell to the low single-digits as Coinbase recorded nearly $600 million in losses on crypto investments. 

Operating margin was 34.7% in Q1, down from 45.5% in Q4 and 46.4% in the year ago quarter, as operating expenses rose more than 51% YoY in the quarter. According to the CFO on the call: “Our total operating expenses were $1.3 billion, up 7%, primarily driven by higher variable expenses resulting from elevated market maker activity earlier in the quarter, as well as losses on our crypto assets for operations.” 

Net margin was 3.2%, down from 56.8% in Q4 and 71.9% in the year ago quarter, primarily due to the crypto investment losses, the majority of which were unrealized. 

The company is introducing a new metric called adjusted net margin which excludes the tax adjusted impact of crypto investment portfolio gains or losses. The CFO stated the adjusted net income was $527 million this quarter.  

Stock-based compensation was $191 million, or just over 9% of revenue in Q1. For Q2, Coinbase guided for SBC of ~$195 million. 

EPS and Adjusted EBITDA 

Coinbase places an emphasis on adjusted EBITDA due to fluctuations that can arise from its crypto asset holdings, such as what it witnessed in Q1. Adjusted EBITDA was $930 million for a 45.7% margin, down from a 56.8% margin in Q4 and a 61.9% margin a year ago. 

Due to impact from its crypto holdings, Coinbase’s GAAP EPS was $0.24, well below the $1.91 estimate for the quarter. Adjusted EPS was $1.94, slightly below estimates for $1.98. 

Cash and Balance Sheet 

Operating cash flow was weak in Q2, though Coinbase’s liquidity profile remained strong. 

• Operating cash flow was ($187.3) million for a (9%) margin, its first cash outflow in five quarters. This is also a stark contrast to the 21.5% OCF margin from a year ago and a 42.5% margin in Q4. 
• Cash and equivalents totaled $8.05 billion, with Coinbase noting it had a total liquidity profile of $9.9 billion when including its net USDC balance of $1.86 billion. Debt remained steady at $4.24 billion. 

Q2 Outlook 

Coinbase said that April transaction revenue was ~$240 million, while spot transaction volume was down (12%) MoM, slightly outperforming the broader industry at (13%) MoM. According to the CFO this is aligned with global spot trading trends: “Our spot transaction volume declined approximately 12% month-over-month in April, and this was similar to global spot volume, which was down approximately 13% over that same time period.” Our checks show that Binance declined 18.8% MoM yet popular/rising platform Gate.io increased about 14% MoM. 

Subscription and Services revenue was guided at $600-680 million, with Coinbase expecting QoQ growth in stablecoin revenue “to be more than offset by a decline in blockchain revenue due to lower crypto asset prices.” Coinbase added that to-date in Q2, Solana and Ethereum have already declined (25%) and (36%) compared to their Q1 averages. 

Earnings Q&A: 

Deribit Acquisition: 

The Deribit acquisition for $2.9 billion will be a mix of $700M in cash and 11 million shares. According to the CFO, the acquisition will be adjusted EBITDA accretive.  

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 aligns with Coinbase’s global strategy as the company also shared (separately) they are growing rapidly in Argentina and India. According to the opening remarks: “This makes Coinbase the #1 crypto derivative platform globally by open interest. And it's our biggest move yet to accelerate our international road map and build out this comprehensive trading platform.” 

It’s also a strategy to pull together spot, future and options trading onto one global platform. According to the CEO, there is strong cross-selling opportunity: 

“Brian Armstrong CEO: 

Yes. And Ken, I'll just add real quick on your cross-selling point. I think this is really important. So a trader can actually go in and hedge futures position with options without having to switch platforms. So that's why we think that there is a cross-selling opportunity. And this is — improves the efficiency but also improves trading volume if they can do that all in 1 platform.” 

However, as of now, the United States is a restricted jurisdiction for options trading unless on a CFTC-regulated platform or a SEC-regulated platform, but the CEO foresees approval coming soon for Coinbase: “We've been working very closely with the CFTC to turn and get perpetual futures live in the U.S. That's going to take a little bit longer, but we are — we have 1 step in the right direction.” 

USDC Sees Market Cap of $60B 

Circle is a fintech company known for creating USDC with Coinbase sharing revenue of USDC as a backer of Circle. In the most recent quarter, the stablecoin USDC hit a market cap all-time high of $60 billion with USDC held on the Coinbase platform increasing 49% QoQ to $12 billion. It was also stated that the number of monthly users holding USDC has doubled and the average USDC balance has tripled. 

Although stablecoins contribute low revenue right now of $297.5 million, it helps to diversify Coinbase’s revenue during periods of volatility since USDC remains at $1 and is used across payment platforms.  

According to the opening remarks: “In Q2, we'll be onboarding the first businesses to our pilot, enabling them to make stablecoin pay-ins and payouts. Given Coinbase's long history building crypto infrastructure, custody trading and our network of bank partners around the world, we think we're well positioned to power stablecoin payments for many businesses.” 

Binance recently joined the partnership with the CFO stating adding a large distribution partner will result in more liquidity and global adoption: “The rationale for adding distribution partners is we believe that we mean it drives liquidity, it drives global adoption. There are more and more places for customers to onboard and offboard USDC and to engage in products and services. These network effects, larger market cap, deeper liquidity, more places for customers to exchange, we think, is going to drive overall growth and opportunity for USDC.” 

Conclusion: 

Coinbase did not offer the most exciting earnings report this quarter, but it also does not matter much given Coinbase’s stock moves intraquarter as its tied closely to crypto trading volumes and asset prices. 

It does not take a stretch of the imagination to see the crypto empire this company is building. Coinbase acts as a leveraged bet on Bitcoin yet is also diversifying beyond spot trading to include subscription services, stablecoins, derivatives and now options trading. As digital assets gain broader adoption, Coinbase is positioned to participate across every major touchpoint: from trading and custody to staking, payments, and Layer 2 scaling with Base. We've covered Coinbase’s more durable business model in the past here. 

Notably, it’s rare to see an opportunity in the crypto sector offer quality fundamentals. Not only does this help the stock to withstand volatility when other crypto assets are being slammed, but its large cash reserves can be leveraged to grow the empire. This piece – the cash – should not be overlooked when evaluating the strength of the stock and the company’s long-term prospects. 

What’s Next on our New Discovery Tier … 

Next week on our new Discovery tier, we’ll spotlight some of the strongest Q1 earnings reports from companies not currently in our portfolio. If you’ve seen a stock surge after hours and are wondering how it stacks up — or whether it has real long-term potential — our Discovery tier is built just for that: surfacing compelling new opportunities.

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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.

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Coinbase’s Q4 report was a blowout, with revenue beating estimates by more than 23% as transaction revenue and trading volumes both rose high triple-digits on a QoQ and YoY basis in the quarter. EPS of $4.68 came in more than 100% above estimates, with Coinbase benefiting partially from gains on crypto asset holdings and higher prices, while adjusted EBITDA and operating income generation were strong.

Management discussed share gains as a growth driver, as trading volume growth significantly outpaced spot market growth on a sequential basis, by as much as 50 points for consumer trading volumes. Transaction revenue growing at a higher rate than trading volumes for both consumer and institutional segments highlighted improvements in monetization, fueled by diversification in revenue streams to stablecoins, financing and subscriptions, and more.

Revenue

Coinbase reported a rather large revenue beat in Q4, following in Robinhood’s footsteps with strong growth in consumer transaction revenues in the quarter. Revenue increased 138.2% YoY and 88.5% QoQ to $2.27 billion, well ahead of estimates for $1.84 billion. The revenue outperformance was driven by significant triple-digit sequential growth in trading volumes, fueled by elevated crypto trading activity and a 27% sequential uptick in volatility as Bitcoin chopped around the $100K mark.

Management also said that they had “reached an all-time high for both U.S. spot and global derivatives market share in Q4,” with contributions from derivatives trading appearing in transaction revenue.

Q4’s strength was a stark contrast to Q3 for the spot market, which rebounded substantially in the quarter. In Q3, the US spot market had declined (18%) QoQ, but in Q4, the US spot market increased 126% QoQ.

For 2024, Coinbase reported $6.56 billion in revenue, up 111.2% YoY, driven by a strong Q1 and Q4. This was fueled by 148% YoY growth in trading volume to $1.2 trillion, with positive macro factors in the approval of Bitcoin ETFs in Q1 and the election of a pro-crypto administration in Q4.

Looking ahead, growth is expected to be in the mid-thirty percent rage for 1H, a substantial revenue from 1.5% and 16.3% estimated prior to the report. Trading volumes are already up significantly on a YoY basis YTD (discussed further below in Q1 Outlook). As a reminder to what we’ve stated in our deep dive from September, it’s nearly impossible to predict quarterly revenue this far in advance as asset volatility and trading volumes can be unpredictable. Recall from our post-Q3 write-up that Q4’s original grow estimate was 100 points lower at 38.9% YoY.

Key Metrics

Trading Volume

Trading volume grew significantly in the quarter, with both consumer and institutional trading volume outpacing spot market growth of 126% QoQ. Q4’s trading volume rose 137% QoQ and 185% YoY to $439 billion, the highest growth rate of the year and accelerating from 143% YoY in Q3. Interestingly, Bitcoin’s share of trading volume declined from 37% in Q3 to 27% in Q4, with other assets gaining 15 points share to 48%.

For 2024, trading volume rose 148% YoY to $1.16 trillion, still well below 2021’s peak of $1.67 trillion.

Consumer trading volume surged 224% YoY and 176% QoQ to $94 billion, outpacing spot market growth by 50 points. What’s notable is that consumer trading volumes are still well below 2021’s peaks despite Bitcoin surpassing $100,000 – consumer trading volume is under half of what it was in Q4 2021.

Institutional trading volume grew 176% YoY and 128% QoQ to $345 billion, rebounding from a string of sequential declines after Q1 this year. Institutional volumes nearly surpassed its prior record of $371 billion, coming in just 7% below that mark.

Transaction Revenue

This strong trading volume growth translated into strong transaction revenue growth; Q4’s transaction revenue 194% YoY and 172% QoQ to $1.56 billion. Despite accounting for a fraction of volume, consumer transaction revenue is the primary revenue driver, growing of 187% YoY and 179% QoQ to $1.35 billion. Institutional transaction revenue surged 285% YoY and 156% QoQ to $141.3 million – Coinbase provided a few factors that fueled this growth, discussed below.

For 2024, transaction revenue increased more than 162% YoY to $3.99 billion. Consumer transaction revenue rose 157% YoY to $3.43 billion, while institutional transaction revenue increased 283% YoY to $346 billion. Base and other transaction revenue rose 121% YoY to $210 million – Coinbase provided some strong stats for Base, with platform assets rising 89% YoY to $1.4 billion for 2024 and $25 billion in stablecoin transaction volume in Q4.

Consumer transaction revenue was 38% below Q4 2021’s peak above $2 billion, faring better than volume at 47% below peak. Consumer revenue also benefitted from a notably strong uptick in monthly transacting users (MTUs), which rose 24% QoQ to 9.7 million (still below Q4 21’s peak at 11.2 million) as Coinbase worked to improve trading experiences on the platform and added 13 new assets including “popular memecoins like PEPE and WIF” in Q4.

Interestingly, Coinbase noted that “nearly half of trading customers in Q4 were either new to Coinbase or resurrected from prior cycles.” While not a true driver of revenue, it’s a positive sign to see re-engagement of old customers and substantial new customer additions that can be monetized.

Despite being below peak volume, institutional transaction revenue reached a new peak at $141.3 million. This was nearly 56% higher than in Q4 when trading volume peaked, as Coinbase is benefiting from Prime and new products like derivates.

Management noted that they are seeing “significant momentum” in the institutional business, including “strong adoption of our Prime suite across custody, prime trading, financing, and staking, with top clients engaging with most of these products in 2024,” adding that “Prime Financing saw all-time high loan balances in Q4 [with] elevated client trading activity among customers who use financing.”

A quick note on Base (which we covered in our deep dive here): Coinbase saw “higher revenue per transaction due to increased network demand and higher ETH prices in Q4,” along with sequential growth in transactions. Cost per transaction remained below the $0.01 target, and Coinbase noted a goal to optimize this further in 2025.

Subscription and Services Revenue

Subscription and Services revenue was $641.1 million in Q4, more than 10.5% higher than the upper end of the $505 to $580 million guide provided last quarter. This reflected growth of 15% QoQ and nearly 71% YoY.

For 2024, Subscription and Services revenue grew 64% YoY to $2.31 billion, and notably “was ~4.5x higher compared to levels during the 2021 bull market.” The majority of 2024’s growth was driven by blockchain rewards with revenue more than doubling, stablecoins, and Coinbase One subscriptions.

For Q1, Coinbase guided for Subscription and Services revenue to be between $685 million to $765 million, for approximately 42% YoY growth and 13% QoQ at midpoint. This would be a nearly 30 point deceleration, though for reference, Q4 was originally guided to see 45% YoY growth.

Coinbase said the sequential growth in Q1 would be driven primarily by stablecoin revenue as USDC assets and market cap reached all-time highs in February, “continued growth in our Coinbase One subscriber base, and the higher average crypto asset prices so far in Q1.”

Within subscription and services revenue:

• Stablecoin revenue rose nearly 32% YoY but declined approximately (9%) QoQ to $225.9 million in Q4, driven by USDC growth, with international exchange customer balances more than doubling QoQ (settled in USDC).  For 2024, stablecoin revenue rose 31% YoY to $910 million. Coinbase noted that it facilitated more than $12 billion in on-chain payments in USDC, up 225% YoY. The segment has shown impressive growth, reaching nearly $1 billion in revenue in just two years.
• Blockchain rewards revenue grew 126% YoY and 39% QoQ to $214.9 million in Q4, driven by “higher crypto asset prices, increases in average protocol reward rates (notably SOL), and continued native unit inflows.” For 2024, blockchain rewards revenue increased 113% YoY to $706 million.
• Interest and finance fee income rose 34% YoY and 3% QoQ to $64.7 million in Q4, driven by Prime Financing, which saw all-time highs for loan balances after the election. For 2024, interest and finance fee income grew more than 42% YoY to $266 million.
• Custodial fee revenue rose nearly 119% YoY and 36% QoQ to $43.1 million in Q4, fueled by higher crypto prices and growth in native units under custody. Coinbase noted that “BTC inflows were the largest driver of native unit growth, driven by our role as primary custodian for the vast majority of ETFs.” For 2024, custodial fee revenue rose 103% YoY to $142 million.
• Other subscription and service revenue increased 46% YoY and 56% QoQ to $91.4 million, driven primarily by Coinbase One, with subscriber growth each quarter, accelerating in Q4. One subscribers surpassed 600,000 in Q4, marking 50% growth from Q1. For 2024, other subscription and service revenue rose nearly 125% YoY to $283 million.

Margins

Operating margin showed strong growth on both a sequential and YoY basis, up more than 31 points from last quarter and 33 points from last Q4 to 45.5%. Operating margin nearly matched Q1’s level at 46.4%.

Net margin was 56.8% in Q4 as Coinbase reported $1.29 billion in net income, impacted by “$476 million in pre-tax gains on our crypto asset investment portfolio, the vast majority of which were unrealized.” Pre-tax gains were $357 million when reflecting tax impacts. This was a significant QoQ increase from a 6.3% net margin in Q3, and nearly double Q4 2023’s net margin of 28.9%.

Stock-based compensation was $222 million, or 9.8% of revenue, declining (11%) QoQ. For Q1, Coinbase guided for SBC to be approximately $206 million.

EPS and Adjusted EBITDA

Coinbase places an emphasis on adjusted EBITDA due to crypto asset holdings, reporting its highest adjusted EBITDA quarter of the year in Q4 at $1.29 billion versus $1.01 billion in Q1. Adjusted EBITDA margin was 56.8% in Q4, up from 37.2% in Q3 but down from 61.9% in Q1 due to higher revenue.

For 2024, adjusted EBITDA was $3.35 billion in 2024, rising more than 242% YoY. Adjusted EBITDA margin expanded from 31.5% in 2023 to 51.0% in 2024.

Coinbase posted a rather huge EPS beat in Q4, with diluted GAAP EPS of $4.68 coming in at more than double the $2.04 estimate. This also surpassed the $4.40 in GAAP EPS that Coinbase generated in Q1. One primary takeaway here is that strong spot market conditions and elevated volatility are exponentially beneficial to Coinbase’s earnings generation and growth – Q1 and Q4 accounted for nearly 96% of 2024’s EPS generation.

Cash and Balance Sheet

Operating cash flow remained strong in Q4, rising more than 38% QoQ to $964.6 million. This also marked substantial growth from negative operating cash flow of ($5.2 million) in the year ago quarter. OCF margin was 42.5% in Q4. For 2024, operating cash flow rose 169% YoY to $2.56 billion, with OCF margin expanding from 29.7% to 39.0%.

Cash and equivalents totaled $8.54 billion, while debt remained steady at $4.23 billion. Coinbase is continuing to grow its cash reserves at a quick rate – cash is up almost 11% QoQ and 66% YoY, from $5.14 billion in Q4 2023.

This is quite different than Robinhood, where cash reserves have been flat at $5.1 billion since Q2 2024, and down from $5.3 billion a year ago. Cash and equivalents account for approximately 20% of Robinhood’s total assets, versus 38% for Coinbase.

Q1 Outlook

Coinbase provided a snapshot of transaction revenue for Q1 to date, noting that through February 11, transaction revenue was approximately $750 million. Coinbase cautions not to extrapolate this for the quarter as volatility and asset prices could change on a whim and quickly alter the path of revenue generation, but data from The Block supports a strong quarter of growth, with Coinbase gaining some share.

Monthly exchange volume was estimated to decline approximately (21%) MoM to $2.32 trillion in January, with Coinbase’s volume estimated to decline just (17%) MoM to $159 billion. Through February 14, Coinbase is estimated to have seen trading volume of $64.5 billion, with total exchange volume at $943 billion.

As a percentage of monthly exchange volume, Coinbase’s share rose from 6.5% in December to nearly 6.9% in January and 6.8% in February; both this and the relative outperformance on volume support management’s commentary that they are gaining share.

So far, halfway through Q1, Coinbase’s trading volume is at nearly $224 billion, versus Q1 2024’s $256 billion. Volumes so far are keeping pace with Q4, though this could change quickly.

Earnings Call Q&A

Management discussed the longer-term vision for crypto to fully evolve into an asset with significant daily usage across the world. CEO Brian Armstrong explained Coinbase thinks “crypto is much, much more than just an asset class that people want to trade. There's going to be daily use cases for everybody in the world as crypto updates the global financial system,” touching upon some opportunities in payments and tokenizing securities.

Stablecoin Growth, Revenue Diversification and USDC

Coinbase noted that it diversified its revenue streams during Q4, with growth in derivatives, stablecoins, USDC, staking and other products.

Management shared some interesting stats on stablecoins in the Q&A portion of the call, saying that “there was $30 trillion of crypto stablecoin volume last year. That was up 3x year over year.” CEO Brian Armstrong discussed that for stablecoins, Coinbase believes it can fuel more growth “just driving more partnerships with global and local players like Stripe and Yellow Card to do more global adoption. We've been adding a number of additional stable coin trading pairs on our platform. We've been offering rewards to our customers when they hold USDC,” and these efforts have helped drive stablecoin adoption and revenue in 2024.

Management sees stablecoin payments as a large opportunity in the future, saying that “we're moving with haste to integrate crypto payments across our entire suite of products. We think that'll be a big business over time.”

For USDC, management explained that they “have a stretch goal to make USDC the number one dollar stablecoin,” as it “has a network effect behind it” and could be “really defensible long term. So we'll be accelerating the market cap growth of USDC with more partnerships and leaning into new use cases like adding payment support across our product suite.”

International revenue is improving as well, with management explaining that “international revenue share reached 19% in Q4. And this is due to improved payment rails and localization. We've got a repeatable playbook now that we can launch in these new markets and get them to contribution margin positive. And so we're going to keep doing that in more markets.”

Derivatives Growth

Given that management pointed out that global derivatives reached an all-time high in Q4, they fielded questions about take rates long-term:

Q: Devin Ryan, Citizens JPM: A question on international derivatives. Obviously, just gaining kind of massive traction there and another great quarter of growth. Seems like the fees there are quite a bit lower, obviously. And so also appreciate that might make sense as you're taking share at this type of rate. But I'm curious as you think about take rates in derivatives kind of longer term, should we expect that they would kind of hold the line with where they are now? Or could there be an opportunity to actually increase the take rates as you get to kind of a more mature share?

A: Alesia Haas, Coinbase CFO

“So right now we're focused on building liquidity and building trading volume. And we are providing incentives to various market participants and focus on building that depth of liquidity in each of the order books as we put them on the platform. So, yes, I do believe that over time our fees will evolve and become more mature as we gain this to the scale and market position that we seek to have. And that right now we are not focused on monetizing at the top of the range.

That said, we're going to monetize this competitive with the market. And this is a lower priced product than spot trading. And so you can see us be in a competitive market position here, but not at the current levels that we are today.”

Coinbase is hinting at a path to higher fees, but remaining at a lower take rate than spot trading, requiring more volume to generate the same amount of revenue.

Tokenizing Securities

Management also discussed the tokenization of securities, where they see the potential for a wide range of real-world assets to be brought on-chain with real-time clearing, settlement, and ability to trade 24/7 across the globe.

Q: John Todaro, Needham:

“I have a broader question about the overall vision for Coinbase to maybe become something a lot bigger than a crypto brokerage. The two areas I see are stablecoins and the tokenized real-world assets, which you've discussed some, you could see a world where a lot of that transfer activity ultimately happens on Base. So one, just do you agree with that vision? And then two, is there anything more specifically you guys can do to push both of those segments?”

A: Brian Armstrong, Coinbase CEO:

“Well, that is definitely the plan. … And tokenizing real-world assets or traditional securities. I mean eventually, real estate, the debt markets like private credit, everything should come on chain. It's really just a more efficient way of transferring value and it can do real-time settlement and eliminate various risks that are out there in the ecosystem. So I mean, there's lots that we can do on this front.”

Crypto and Global GDP

Coinbase also shared a long-term vision for the crypto industry, predicting that “up to 10% of global GDP could be running on crypto rails by the end of this decade.” Management noted that “only about half of 1% of global GDP is [currently] running on crypto rails, but we think that, that could expand dramatically by the end of the decade.”

Based on global GDP of ~$105 trillion in 2023, that correlates with about $500 billion of GDP running on crypto. By 2030, global GDP is estimated to rise to $140 trillion, per the IMF, suggesting that crypto’s influence could rise to $10 trillion to $14 trillion should this prediction be realized – that’s more than 20x growth from today for the industry.

Conclusion

Coinbase posted a large beat in Q4 as elevated trading activity and higher volatility drove triple-digit transaction revenue and trading volume growth. Management highlighted revenue diversification with stablecoin and USDC contributions rising, with blockchain rewards and international markets two other growth outlets. Q1 is also off to a solid start with trading volumes keeping pace with Q4, with transaction revenue at $750 million halfway through the quarter, setting the stage for a strong entrance to 2025.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

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.

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Chainlink is one of our favorite long-term plays for a ten-year holding period or more. The number of stocks our firm has held without interruption since the day we launched our site in July of 2019 is very few, not even Microsoft makes that list. But, Chainlink does.

The company is a reliable source for off-chain data across all blockchain networks and blockchain apps. Chainlink’s interoperability causes its oracle networks to be leveraged and trusted across competing blockchains. Customers that require the highest level of security, such as bank transfers, rely on Chainlink’s oracle price feeds and the other off-chain data that Chainlink supplies.

To understand the problem that Chainlink solves, it’s important to discuss the overarching issues the blockchain faces. There are three necessary tenets to a fully developed blockchain protocol: security, decentralization and scalability. This trifecta is often called the “trilemma” as blockchain technologies can typically solve for two of these problems, yet struggle to solve all three. Instead, current blockchain technologies excel at two of the three, and then must experiment to solve the third with sidechains, sharding and other nascent attempts at solving the third requirement.

The analysis below discusses how Chainlink solves some of the toughest pain points in blockchain development by enabling the third, missing pillar – whether that be security, decentralization or scalability. Because Chainlink is both middleware and a Layer 2 technology, its oracle networks are utilized across nearly all leading blockchain networks plus hundreds of applications. By offering must-have solutions early-on, Chainlink is proving it can become a frontrunner for the day when blockchain reaches critical mass.

I realize the information below can be technical, and thus I’d like to provide a 10,000 foot overview of what is being described in the deep dive.

Summary:Summary: Chainlink has the key ingredients to become a front runner in blockchain technologies because:

• it can serve nearly all Layer 1s and Layer 2s for the ultimate addressable market
• Chainlink’s suite of technologies solve some of the hardest problems that blockchain technologies faces today 
• An oracle network for offchain data can form a moat — as the quality of its security and decentralization increases– it will be harder to disrupt as time goes on. Blockchain technologies will not want to take a chance on a new entrant ten years from now. I foresee a duopoly of sorts for oracle networks.
• The finance sector has essentially adopted two blockchain technologies: Bitcoin as a store of value, and Chainlink for its ability to facilitate transfers with offchain data. Given there have been thousands of blockchain technologies, it’s clear to see front runners are being adopted by the savvy $6.4 trillion banking sector.

Section 1: How Chainlink Solves Blockchain’s Trilemma

Bitcoin’s network has prioritized security and decentralization, while sacrificing scalability. The network sends 7 transactions per second and can take up to 10 minutes to confirm a transaction. The upside is the network’s security is bullet-proof with a hash rate of 460 Exahash per second. It’s impossible today for a super computer to crack the Proof-of-Work encryption.

When you add the fact there are thousands of nodes globally, a Proof of Work system is truly decentralized whereas a Proof of Stake (PoS) system could still concentrate itself through “whales,” those who own a disproportionate amount of a single token. This results in the wealthiest crypto holders having a higher concentration in what is essentially a lottery system of validators. If a person has a thousand lottery tickets compared to a person with only ten, the person with 1,000 tickets (or nodes in this case) is more likely to be chosen to validate the ledger. This could lead to corruption and ultimately does not fit crypto’s ethos that those with a higher concentration of wealth are allowed to be more trusted and have more authority.

It’s been generally understood for some time that Ethereum has prioritized security and decentralization over scalability. Despite scalability being the primary problem Ethereum has left to solve, there are solid debates that Ethereum is not as secure or decentralized as it once was following the merge to Proof of Stake (PoS). To understand these concerns, consider that Ethereum has seen up to 70% of its supply held by whales in 2021, although the latest report is that 43% of ETH supply is held by whales. The concentration is staggering as six of the top crypto wallets have 98% of their wallets allocated to the Ethereum blockchain, according to TechCrunch.

When looking more closely at Proof of Stake (PoS) validators for Ethereum, Lido is the largest Ethereum validator at 33% stake and Coinbase is at 15%. To help illustrate how unusual this concentration is, consider that the Nakamoto Coefficient for Ethereum is 2, which means it takes only two nodes to control the blockchain. Truly, it’s beyond belief the coefficient is this low for the world’s top blockchain Layer 1. Bitcoin’s is estimated to be as high as 9601. The highest Coefficient beyond Bitcoin is 236 for a network called Humanode, and its goal is to increase the coefficient over time. The last time Solana’s was reported in 2023, it stood at a coefficient of 31.

Also consider that PoS requires 32 ETH, or about $96,000 per node, whereas Proof of Work requires a mining setup of less than $10,000. This means Ethereum is far less democratized. There was also a report in May of 2024 that one whale staked about $500 million to the network. There is also some centralization by the very fact Lido has such a large pool of validators at 33%.

Solana receives less criticism as it offers Proof of History (PoH) which offers a high throughput of 65,000 transactions per second on GPUs although other blockchain networks have a higher time to finality. Solana accomplishes this without second layers or side chains by using the Proof of History (PoH) consensus mechanism. PoH creates a historical record that proves an event has occurred at a specific moment in time. Rather than validators agreeing on a time, Solana validators maintain their own clock by encoding the time with a cryptographic hash function (SHA-256). This circumvents the need to wait for confirmation, thereby resulting in a higher throughput.

The purpose of this discussion is to say that many Layer 1s need Layer 2s or middleware to solve for the third tenet of the blockchain. For Ethereum, this is scalability (yet some critics also point toward a lack of decentralization compared to what other Layer 1s offer). What is unique about Layer 2s is the addressable market may be higher than a Layer 1, as the space is heavily fragmented with many Layer 1s competing. The very best middleware and Layer 2s can solve a critical pillar for these competing Layer 1s with little to no fragmentation.

Quick Primer on Smart Contracts

Decentralized systems require contracts if a system is to be created where all data, all messages, all token transfers, and all users are validated. Machines need contracts to offer ultimate security and decentralization as contracts ultimately allow for a revocation if a request is found to be fraudulent. In this case, the machine can shut the request down or otherwise deny the user/token transfer/data/message to move forward. The bilateral nature of contracts allows for a validation process to where nodes can determine if the action is trustworthy.

To put it simply, without contracts, trusted systems cannot truly exist as otherwise there is no penalty. This is why Web2, which is not based on smart contracts, is rife with bad actors. One centralized system can create thousands of bots, or a centralized tech company can push its agenda to the top of a newsfeed. There is no contract, and therefore, there is no revocation for unethical behavior.

Chainlink solves the critical issue of supplying trusted contractual data for smart contracts. Oracles are trusted third-parties that retrieve off-chain information and push that information to the blockchain at predetermined times. Technically, oracles introduce a potential point of failure, and this is why Chainlink’s ultimate goal is to maintain a good reputation. With a good reputation, the network effect will take care of itself since blockchain developers will be attracted to whichever oracle network is the most reliable.

Solving for Decentralization with Oracles:

Decentralization for the blockchain is achieved by having backend code on a decentralized network instead of a centralized server. Developers use a blockchain like Ethereum for data storage and use smart contracts for the app logic. The Ethereum blockchain is run off of thousands of nodes. These nodes are constantly computing the transactions within the blockchain from around the world, making it nearly impossible to hack as well as regulate.

Decentralized applications (Dapps) rely on smart contracts. Dapps deployed on the Ethereum network are controlled by logic written into the smart contract and cannot be altered by the developer. Smart contracts function like APIs (this was also discussed in the Chainlink webinar). This allows applications to build on one another similar to the way applications use APIs today; except blockchain applications build on smart contracts.

Chainlink was primarily built for off chain data for non-currency smart contracts. The principal is the same where there is a set of rules which self-execute – the more common analogy is that it operates like a vending machine to where there is no middleman. When you use a vending machine, you’re inputting a payment and terms (like pushing the buttons #D5) and the output is a bottle of water; the exchange did not require a gas station clerk. Smart contracts are similar in that terms are defined, and when those terms are met, there is an output.

The front-end application can be written in any language with calls made to the backend. The main qualities are that the applications are decentralized, can perform any action given the required resources (whereas Bitcoin is not Turing complete – more on this below) and are executed in a virtual environment such as the Ethereum Virtual Machine. The virtual machine acts as a buffer to where if the application is faulty, it does not affect the blockchain network.

Sounds great, but There’s One Problem …

The concept of decentralization sounds great in theory, yet the problem remains that even if a network is decentralized and secure, the data the applications use may not be decentralized or secure. If banks use the blockchain to drive down costs associated with money transfers, where will the banks get secure foreign exchange data that can’t be tampered with?

Where the Bitcoin protocol differs from networks like Ethereum, Solana, Cardano, Polkadot, Avalanche and others, is that the Bitcoin protocol has only one purpose – which is to transfer and store Bitcoin. Bitcoin is not intended to function like an operating system, and developers cannot develop dencentralized apps (Dapps) for the Bitcoin protocol. Due to having a single purpose, the Bitcoin protocol does not introduce or rely on off-chain data.

As we stated in our 2019 writeup, it’s the world’s most secure network, and in fact, is more secure than 10,000 banks combined. This inherent quality is a primary thesis to the investability and moat of Bitcoin:

“Bitcoin is based on the most secure network in the world, and this solves a very real need for the financial system – which cannot be automated without a decentralized blockchain solution. Technically speaking, bitcoin is also the world’s most secure financial network. The transfers eliminate 3% in processing fees and hedges against inflation. This can, and should be, worth as much as a search engine, enterprise software, a social media network, warehouse fulfillment (AMZN) or iPhone hardware.

Apple, Google, Microsoft and Amazon reached market caps of $1 trillion because their products scale to global populations and are required on a daily basis. Bitcoin not only scales to the global population but it also protects their livelihood – a necessity rather than a convenience. In fact, we see populations who are not necessarily tech savvy most enthusiastic about bitcoin, and this is a strong signal that it will scale beyond the reach of $1 trillion market cap.”

Bitcoin is very different from other blockchain networks because it’s not Turing complete, which means the Bitcoin protocol is not intended to perform computations or to solve complex problems. By limiting its functionality, Bitcoin’s protocol is highly secure. Bitcoin Script verifies transactions but is not programmable for general-purpose computations. Rather than offer scripting capabilities, Bitcoin Script offers a restricted set of operations that apply only to transactions.

The Turing incomplete design offers the ultimate security rather than seeking the functionality of a general-purpose platform. There are about 50,000 distributed Bitcoin nodes, as well, that help to verify and record transactions with a decentralized architecture.

Bitcoin’s goal is very different from Web3 technologies, and this distinction is important. Ethereum’s Solidity programming language is designed to facilitate smart contracts on the Ethereum blockchain. It’s considered “Turing Complete” as it has key features such as reading and writing to memory, branching to move the machine forward and looping to restart execution.

Yet, decentralized applications will require some data, so how can a network claim to be decentralized if the data itself is not originating from a decentralized network?Yet, decentralized applications will require some data, so how can a network claim to be decentralized if the data itself is not originating from a decentralized network?

Swift is a system used by banks and institutions for money and security transfers. Currently, 11,000 banks use SWIFT across 200 countries, and it’s the largest and most streamlined payment system for international transfers. SWIFT facilities secure and efficient communication between institutions with 45 million messages sent in 2022. The reason Swift is looking to innovate with blockchain technologies is to avoid becoming disrupted. The company charges between $15 to $50 on average for a transfer and it can take hours or days for the transfer to be completed. The security and decentralization of a blockchain network is attractive to Swift, yet there will be issues if the pricing data used by the blockchain for settlement is not accurate.

In this example, Chainlink provides a pricing oracle for Swift’s smart contracts and for many other financial applications that need accurate pricing information for settlements. The pricing information needed for foreign exchanges, cryptocurrency swaps, stock prices and other assets is sourced from decentralized data.

Oracles assist in helping blockchains use off-chain data.

Chainlink has built a decentralized oracle network (DON) that aggregates independent node operators, reliable data sources and also oracle networks for accurate, decentralized data. For example, Chainlink will determine crypto pricing by combining many sources from price data aggregators (like Coinbase and dozens of others like Coinbase), with node operators (there are hundreds), and with oracle networks like Ethereum or Solana. By aggregating many data sources and many types of data sources, the pricing feed eliminates a single source of failure.

Solving for Scale: Chainlink Securely Enables Rollups

Blockchain seeks to disrupt nearly every industry, and yet, it’s unfathomable for some investors to envision this outcome when it’s costly and slow to transfer tokens and data. Ethereum’s primary issue is scale as the Layer 1 has seen exorbitant gas fees. There was an outlandish case where someone bought a NFT for 1 ETH, or about $2600, and was charged $70,000 due to high gas fees. Yuga Labs has seen gas fees of up to $176 million for $285 million in sales prior to the merge to Proof of Stake. Gas fees are a result of Ethereum having low transactions per second (TPS) in the 20-40 transactions range. Once the limit is reached, the remaining transactions compete, resulting in higher fees.

Proof of Stake (PoS) relies on a few key technologies to drive down energy consumption, such as staking with validators for decentralization purposes, shards that break tasks into a subset, a dispersed network of nodes to increase efficient processing using the Beacon chain, and Rollups where hundreds of transfers can be rolled into a single transaction. With Rollups, the smart contract verifies all of the transfers in the Rollups. The goal is to reduce computing and storage resources by reducing the amount of data held in a transaction.

Ethereum offers ZK Rollups, or Zero-Knowledge, which we’ve covered here. However, rollups are a dedicated instance, and therefore can be customized and are interchangeable with other networks. A company called Cosmos released Rollkit and other developer tools that increase time to market for developers while seeking to lower the cost of zero-knowledge proofs.

Therefore, the development and functionality are separate from the Layer 1. This is especially attractive to enterprises that do not need a specific Layer 1 (like Ethereum) to reach scale since they already have a customer base. We touched on Coinbase using Rollups for the Base Layer 2 stating it offers “1 cent, 1 second transactions.” SAP has recently minted USDC on a Layer 2 solution with a statement it’s “getting close to that one cent cost basis.”

The Optimistic Collective developed a network and stack that Coinbase’s Base uses for its Rollups. This means that CB’s Base settles on Ethereum’s network for security purposes, yet uses the OP stack to execute Rollups outside of Ethereum. This is ideal as Coinbase can switch blockchain Layer 1s at any time. The amount of development that has occurred on Layer 2s since Rollups and the merge to PoS on Ethereum is staggering. For example, according to Chainlink, there are “approximately 48X the amount of on-chain calls from dApps to Chainlink Data Feeds over the past 12 months compared to Ethereum’s baselayer.”

Offchain Labs created a Layer 2 called Arbitrum that directly competes with CB’s Base and is currently ahead of Base on a few key metrics, although Base’s growth has been more rapid and will likely surpass Arbitrum. According to the writeup and data from Token Terminal, Arbitrum’s fees are much lower than Base, which is a distinct advantage in utility, yet Base is leading on gross profits at $30 million estimated compared to Arbitrum’s $9.5 million.

With Rollups, Chainlink’s purpose has expanded to where Chainlink nodes are used to do computations and verifications before posting a bundled transaction. This means an app built on a Layer 2 like Arbitrum or Base only has to use the main chain when necessary.

Layer 2 chains and rollups have a separate ledger, and there’s a chance a malicious actor forks a Layer 2 to create a parallel chain to mint new assets or burn assets on the Layer 1. Decentralized oracle networks like Chainlink prevent this from happening by offering Oracle Network Governance, or a trusted source, for routing upgrades to L2/Rollup chains, importing the ledger state, resolving disputes, and helps facilitate L2s that are forked.

Rollups provide an easier path to development as enterprises can avoid having to build a complex Layer 1 chain, while also providing much faster and cheaper transactions. This is ultimately a catalyst for Chainlink to become the oracle network for enterprise dApps. For example, Sony Group’s venture arm recently announced the company is using Chainlink to launch a developer platform that delivers consumer blockchain applications. Similar to Base, Sony will also use Optimism for its scaling layer, while using Chainlink for Data Feeds.

There are 200 protocols that operate on Base (and growing). Chainlink Automation allows developers to offload tasks that require high computational power to the Chainlink Network for a reduction in fees by 90%. Chainlink’s Cross-chain interoperability allows for currency and data transfers between blockchain networks, which can help with Base’s goal of having low cost, yet fast transfers.

Section 2: How Chainlink is Becoming a Blockchain Frontrunner

Here are some of the technologies that Chainlink is using today to quietly become a frontrunner in the crowded and complex Blockchain space:

Chainlink is an abstraction layer, which means it’s agnostic and works across all major chains, such as Polkadot, Avalanche, Binance Smart Chain, Polygon, Optimism, Arbitrum, and more, which eliminates vendor lock-in. This is incredibly important given how nascent the Blockchain ecosystem is, and how the rate of failure is already high and will remain high as blockchain technologies continue to mature.

Chainlink is also future-proofed, which refers to being compatible and scaling even as the blockchain is continually developed. Amazon Web Services (AWS) offers a Quickstart for Chainlink to where DevOps teams can quickly launch a Chainlink oracle node on AWS to sell real-world data. The framework is future-proofed because Chainlink continually updates the integration for data providers to sign their data and broadcast it to the blockchain. For example, NOAA hosts weather data on Google Cloud, which can then be accessed on Ethereum’s blockchain, which in turn powers crop insurance agreements.

Trust-Minimized Oracle Computation: As enterprise apps grow in complexity, Chainlink not only offers trusted off-chain data through decentralized oracle networks (DONs) but the company also offers developers a path in performing off-chain computations. These off-chain computations are gasless and as fast as native hardware. For example, if a developer wants to make a conclusion based on historical weather data, there would be multiple steps in taking the API data and performing a computation. These computations can be done on behalf of smart contracts in a trust-minimized manner. Chainlink Functions is a serverless developer platform that offers compute runtime to test, simulate and run offchain logic for Web3 apps, similar to how AWS Lambda offers serverless solutions.

Chainlink Automation: Automation uses oracle computation to run predefined conditions and to trigger smart contracts, for example, when stock or token limit orders are hit on a decentralized exchange. The decentralized network of nodes performs the off-chain computation of the contract’s logic that is then verified on-chain.

According to Chainlink, there are three key benefits to using the company’s smart contract automation. The first is that the company removes any centralized point of failure through decentralized oracle networks (DONs). Secondly, DevOps time is reduced by leveraging LINK’s Automation-compatible contract infrastructure. Third, developers enhance the security of their protocols by removing the need for centralized servers.

Secondly, rather than investing time and resources in creating scripts for on-chain monitoring and triggering smart contract execution, developers can plug into Chainlink Automation’s optimized infrastructure by simply creating an Automation-compatible contract and registering it. This saves time, reduces the DevOps workload, and allows developers to focus on writing more great code. 

Lastly, by using Chainlink Automation, developers can enhance the security of their protocol. Developers no longer have to risk exposing their own private key when initiating transactions from centralized servers—the nodes on the Chainlink Automation Network will sign on-chain transactions.

Cross-Chain Interoperability Protocol (CCIP): Blockchains are fragmented and there is too much friction in payment transfers and information exchanged between applications. Web3 must function seamlessly like Web2 to where the infrastructure (AWS, Azure, GCP), the protocols (TCP/IP, SMTP) the operating systems (Windows, Linux, MacOS, Android, iOS), the applications and the software are seamlessly working together without friction. In the majority of these cases, the user is unaware of the systems that support the user experience.

Chainlink’s CCIP sets out to solve this by providing a bridge between blockchains and DeFi applications. The protocol was launched in July of 2023 to solve the pain point of seamlessly transferring data and currencies across various blockchain networks. At launch, it was integrated with Ethereum, Avalanche, Polygon and Optimism. This allows users to use any decentralized application (dApp) on these blockchains for liquidity purposes and connectivity.

Chainlink is uniquely positioned to solve the problem of bridging blockchains and popular applications because it has built a secure oracle network. CCIP extends the idea of an oracle network, which was originally designed to on-load off-chain data, to also offer decentralized oracle computation for performance histories and to monitor for malicious activity. Off-Chain Reporting (OCR) is used to aggregate a report from many validators, which reduces congestion.

Please note: The deep dive 2023 Chainlink Update: Interoperability for Blockchains, Bullish SWIFT Partnership goes into more detail around the importance of CCIP.2023 Chainlink Update: Interoperability for Blockchains, Bullish SWIFT Partnership goes into more detail around the importance of CCIP.

Price Feeds: Chainlink Price Feeds provide smart contracts with access to financial market data. Decentralized Finance (DeFi) is a $100 billion+ market and whichever oracle network is deemed most reliable will carve a deep moat for itself. Price Feeds are used for on-chain currency transfers where a reliable token or currency amount is needed. Chainlink’s data feeds and price feeds currently secure tens of billions in value across DeFi.

Chainlink SCALE: Chainlink’s SCALE program was launched to help newer blockchains to cover the cost of decentralized oracle networks initially before decentralized apps (dApps) can cover these costs. This helps to reduce the operating costs of oracles while allowing Layer 2s to access higher volumes of data and more advanced applications. This helps to incubate apps where startup costs would otherwise be prohibitively high.

Chainlink Verifiable Random Function (VRF): Blockchain engineers use random number generation for cryptographic keys to prevent tampering. Private and public cryptographic keys are used today to encrypt and decrypt data, and are used across domain name systems (DNS), application security and zero-knowledge trust. There is a similar need for private and public cryptographic keys for blockchain applications. Chainlink VRF is the most widely adopted random number generator (RNG) in Web3, and has generated over 21 million request transactions for thousands of smart contracts.

Chainlink’s Ecosystem:

Chainlink launched on the Ethereum mainnet on May 30th, 2019. We covered the altcoin for the first time in August of 2019. Prior to launch, Chainlink signed 30 partnerships. By 2020, when we covered Chainlink a second time, total value secured (TVS) had grown from $254 million to $6.3 billion, or 23,000% growth in TVS. At crypto’s peak in Nov of 2021, Chainlink had $75 billion in total value secured across up to 1500 protocols and hundreds of DeFi applications. This has declined to $25.5 billion today and $31 billion in the past 30 days, yet the TVS from 2021 is important as it shows Chainlink is capable of securing $75 billion without a hack. As the CEO stated at SmartCon:

“Right now, the Chainlink Network has provided the most cryptographic truth in history.”

According to CoinDesk, the transaction value of data points that Chainlink has delivered on-chain stands at $15 trillion, up from $9 trillion at the start of the year. As stated, there’s been no hacks or otherwise any tokens lost through Chainlink’s secure network.

The predominant use of Chainlink is for market data for DeFi apps. DeFi apps have grown in total value locked (TVL) from $700 million in December of 2019 to more than $90 billion today. With the launch of CCIP, Chainlink can use its strong track record in securing DeFi blockchain smart contracts to expand to cross-chain smart contracts.

Update on SWIFT Partnership:

Perhaps where Chainlink is most promising in the near-term is the SWIFT Partnership as Swift facilitates $50 billion in transactions every year.

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications (SWIFT) and is the system used by banks and institutions for money and security transfers. Currently, 11,000 banks use SWIFT across 200 countries, and it’s the largest and most streamlined payment system for international transfers. SWIFT facilities secure and efficient communication between institutions with 45 million messages sent per day in 2022.

When we last covered the SWIFT partnership, a test had been completed using Chainlink’s CCIP to facilitate transactions with tokenized assets on public and private blockchains using back-end systems. This will allow financial institutions to integrate blockchain technology into the existing infrastructure. You can read more about this on Swift’s website here.

This month, it was announced the testing phase has been complete and the Swift partnership is now in the pre-production phase.

Tokenomics:

One area where critics find fault with Chainlink is the tokenomics. The monthly growth in Chainlink’s circulating supply is at 1.4% per month on average. Over the course of a year, this can dilute token holders 10 to 15%, on average.

Chainlink’s fully diluted market cap tracks 2.1X higher than its current market cap. There is a circulating supply of 568M tokens yet a max supply of 1 billion tokens.

Of the 1 billion tokens, at the initial coin offering, a little more than one-third was to go to node operators, a little more than one-third was sold in the public sale, and a little less than one-third went to the company to be held in reserves. The 350 million held at the company can be released anytime, which dilutes token holders.

When more of Chainlink’s supply is in circulation, there is likely to be stronger price action. About 63% is in circulation now, and so look for Chainlink’s price to be less volatile in 2 years if we assume the 1.4% per month rate in circulating supply continues.

Conclusion:

The blockchain is needed to decentralize information to where the global population is not dependent on Big Tech companies for data and inputs. I’ve boldly stated that if people are not concerned by this today, they are not paying attention. The internet is broken as tech companies, media companies and other corporations are full of self-interest and have proven they can’t be trusted. The internet has gatekeepers, and there is ample reason to remove these structures.

Looking beyond information from search and social media, of which there is a great dependency, there is also a dire need for the decentralization of loans, interest-bearing accounts and credit. Imagine if you could make the 20% APR that Chase makes off loaning for credit cards, yet to do so by using the blockchain for ensuring the borrower has a high credit score (or collateral) and through a smart contract to where the collateral is retrieved if the borrower does not pay you. Instead, we are offered 4% interest rates on money market accounts and CDs, and this is rare — for the past decade, it’s been as low as 0%. Finance is broken today, as it’s highly centralized and skewed in favor of a few.

There is also the upcoming need over the next decade to improve automation as machine-to-machine communication is not truly possible unless it encompasses the three tenets of the blockchain (security, decentralization, scalability). As the AI era evolves, this will become a driving force for blockchain use cases.

A Note on Crypto …

Last year, I was on a Real Vision interview where they asked me what my investment framework for crypto is and I said: “Technicals, technicals, technicals.” If you want to buy Apple or Microsoft without using technicals, and hold over a long period, that will probably work out just fine. But to participate in these extraordinary companies at an early stage, it’s of ample importance to carefully consider technicals.

We lead with technicals on crypto given it’s early-stage tech. This is different than stocks, where fundamentals lead. The good news is that crypto is sentiment driven, and so it respects price and technicals quite well when managing these positions. With that said, crypto is high risk, high reward and requires an active stance – it is not for those who are new to investing or coming to grips with the ups and downs of the market. We believe there will be extraordinary returns on Chainlink, yet there will also be extraordinary drawdowns.

Our history with Chainlink is quite good – we bought at $1.50 and trimmed in the $25 to $50 range, and then began buying again much lower in the $7 to $11 range. We plan to actively manage Chainlink moving forward. Please join Knox’s weekly webinars on Thursdays at 4:30 p.m. Eastern to hear more on how we plan to manage Chainlink, with a special emphasis this week on crypto.

Recommended Reading:

• Cloudflare Q3 24: Soft Q4 Guide as Company Transitions on Billing Terms
• Crypto and AI Opportunity: Real Vision Video Interview
• Real Vision Video Interview: Will Nvidia Continue to Dominate AI?
• 2023 Chainlink Update: Interoperability for Blockchains, Bullish SWIFT Partnership

Coinbase missed on the top and bottom line, with revenue of $1.205 billion missing estimates by 3.2% and adjusted EPS of $0.28 missing estimates of $0.42. Adjusted EBITDA was 37.1% or $449 million and is the bottom line number Coinbase tracks most closely to due to unrealized losses from owning crypto assets. The company has $8.2 billion on the balance sheet in cash and cash equivalents.

This quarter marked a QoQ decline in revenue of (16.9%) and a decline of (27%) QoQ in transaction revenue. Looking forward, October transaction revenue numbers were in line with Q3 at $190 million, or $570 million if we assume a similar trend continues. Q3’s transaction revenues were $572.5 million.

Broadly speaking, the crypto market was softer in Q3 than in Q2. Total crypto market capitalization flat QoQ while the average crypto market capitalization decreased 10% QoQ. Crypto asset volatility, a key driver of trading volume, was down 5% QoQ and the total trading volume for the United States spot market declined 18% QoQ. Trading volume for the US spot market is where the majority of Coinbase’s revenue is derived.

Our firm is working with Wealth Umbrella to put out a note on Bitcoin this week for the free newsletter with an outlined trading plan. It’s a must-read. There is also a similar trading plan for Coinbase, which if confirmed, the charts indicate would move in lock-step with the leading crypto asset. Knox will review this trading plan in the Oct 31st webinar. This stock has a leading allocation in our portfolio, and thus, we are watching the technicals closely as Coinbase is largely dependent on volatility and asset prices, and is not tied as much to the results of an earnings report. Should Bitcoin not extend, there is risk management plan for that, as well.

Revenue

Coinbase reported revenue of $1.21 billion in Q3, for YoY growth of 78.9% and a QoQ decline of (16.9%), driven lower by a (27%) QoQ decline in transaction revenue. This marked a deceleration from the 104.8% YoY growth rate recorded in Q2, and also fell shy of the consensus estimate for $1.25 billion in revenue.

Coinbase said that “average crypto market capitalization decreased 10% Q/Q over the same period,” with lower average crypto prices, while “crypto asset volatility — a key driver of trading volume — declined approximately 5% when comparing the Q3 average with the Q2 average.” This drove an (18%) QoQ decline in both US spot trading volumes and Coinbase’s internal trading volumes in Q3.

Despite the more challenging market conditions for revenue generation and QoQ growth, Coinbase noted that it is working to drive revenue through diversification, including stable coins, derivatives, international expansion and custody solutions.

Moving forward, Coinbase’s quarterly revenue growth rates are expected to continue decelerating, with Q1 seeing a YoY decline of nearly (16%) as Coinbase begins to lap difficult comps. As stated in our deep dive last month, it’s nearly impossible to predict crypto prices and volatility this far in advance. Thus, Coinbase typically sees heavy revision activity on a 3M and 6M basis:

The bottom line is even more unpredictable:

Key Segments

As previously mentioned, Coinbase’s trading volume was $185 billion in Q3, down (18%) QoQ but up 143% YoY on low comps from when Bitcoin and crypto traded at depressed prices in 2023.

Consumer trading volume moderated slightly in the quarter, coming in at $34 billion, down from $37 billion in Q2. Transaction revenue in Q3 was $572.5M, up 98.4% YoY and down (26.7%) QoQ.

What’s notable here is that despite a single digit decline in consumer trading volume on a QoQ basis, from $37 billion to $34 billion, consumer transaction revenue declined (27%) QoQ to $483 million. Coinbase gave three reasons for the outsized sequential decline in transaction revenues versus trading volumes:

• Share of US fiat-crypto trading volume, which drives a majority of consumer transaction revenue, was “largely steady Q/Q.”
• Stablecoin pair trading volume increased significantly QoQ, which carries little to no fees. Tether was 15% of trading volume.
• Non-trading revenues decreased, including “decentralized trading through Coinbase Wallet and miner fees.”

The CFO further explained in the Q&A: “First is mix shift where we saw more stable pair trading. Second is we did not see as much revenue in Q3 from the nontrading transaction types. And so as those 2 drivers that led to change in the blended average fee quarter-over-quarter, but no underlying changes to the fees per product, mix and the nontrading revenue changes.”

However, institutional trading volume slipped further, falling to $151 billion, down (20%) QoQ and more than (41%) lower than Q1’s $256 billion. Institutional transaction revenue declined (13%) QoQ to $55 million, largely due to the decline in institutional trading volume.

Base revenue, reported in Other transaction revenue, was $34 million, down 35% QoQ due to lower Base fees – these lower fees drove a sharp uptick in Base transactions, which rose 55% QoQ. Coinbase expects adoption of Base to increase with lower fees.

Coinbase added that October transaction revenue was ~$190 million, which is in line with Q3’s monthly average; however, management cautioned against extrapolating this across the quarter as asset prices and volatility could rapidly change.

Subscription and Services Revenue

Coinbase’s subscription and services revenue came in at $556 million, on the lower end of its guided $530 – $600 million range, for YoY growth of 66.3% and a QoQ decline of (7%). Native units in staking and custody grew QoQ offsetting lower average crypto asset prices.

Management highlighted that this segment was $1.4 billion last year and is tracking $2 billion this year, for growth of 42.8%.

For Q4, Coinbase guided to a wide range of $505 – $580 million for subscription and services revenue, or 44.5% YoY growth at midpoint. This would mark a more than 20 percentage point QoQ deceleration for the segment.

Within subscription and services revenue:

• Stablecoin revenue rose more than 43% YoY and nearly 3% QoQ to $246.9 million, driven primarily by “higher average USDC on-platform balances” and higher USDC market capitalization, offset by lower effective interest rates.
• Blockchain rewards were $154.8 million, up nearly 108% YoY but down (16%) QoQ. Coinbase said that lower average crypto prices, primarily for Ethereum and Solana, drove the QoQ decline.
• Interest and finance fee income was $64 million, up almost 51% YoY but down (8%) QoQ.
• Custodial fee revenue was $31.7 million, up just over 100% YoY but down (8%) QoQ.
• Other subscription and service revenue was $58.7 million, up 100% YoY.

Margins

Operating margin shrunk again sequentially, with Coinbase reporting a 14.1% operating margin in Q3, down from 23.7% in Q2. However, this did mark a notable improvement from an (11.8%) margin in the year ago quarter.

Net margin improved sequentially to 6.3% in Q3, up from 2.5% in Q2, as Coinbase reported $75.5 million in net income, more than doubling the $36.1 million reported in Q2. Coinbase added that net income “included $121 million in pre-tax losses on our crypto asset investment portfolio — the vast majority of which were unrealized — as crypto prices were lower” at the end of Q3 relative to Q2. The losses were $92 million after reflecting the tax impact. Due to the company having 25% of their net cash in crypto assets, the company places emphasis on adjusted EBITDA.

Regarding crypto assets, per the CFO: “The fair market value of our crypto investments was about $1.3 billion at the end of the third quarter. You can see more detail in our filings, but we hold Bitcoin in addition to Ethereum and a mix of other crypto assets.”

Stock-based compensation remained elevated in the quarter, at $248 million, or 20.6% of revenue. For Q4, Coinbase said that they “expect a modest Q/Q decline in stock-based compensation, driven primarily by roll-off of non-recurring multi-year awards.”

Earnings and Adjusted EBITDA

Despite the sequential improvement in net income, Coinbase fell short of earnings estimates, reporting $0.28 in GAAP EPS, compared to the GAAP consensus of $0.38. For Q4, Coinbase is expected to report $0.67 in GAAP EPS, a strong sequential improvement but still down nearly (36%) YoY. Adjusted EPS of $0.28 also fell short of estimates for $0.42. This is due to the $121 million in pre-tax losses on crypto assets mentioned above, and the $92 million when including the tax impact.

Adjusted EBITDA was $449 million, or a margin of 37.1%. This compares to adjusted EBITDA of $595.6 million, or 41.1% of revenue, in Q2, and $178.3 million, or 26.5% of revenue in Q3 2023. This is the company’s 7th consecutive quarter of positive adjusted EBITDA.

Cash Flow and Balance Sheet

Operating cash flow remained exceptionally strong in Q3, with Coinbase reporting OCF of $696.5 million, or 57.8% of revenue. OCF more than doubled YoY from $313.9 million, or 21.4% of revenue.

Cash was $7.72 billion, up from $7.23 billion at the end of Q2, while debt remained flat at $4.23 billion. Given its strong cash flows and strong cash position, Coinbase’s management authorized a $1 billion share buyback in October.

Earnings Call:

More on Consumer Transaction Volume Decline:

When asked if the transaction volume decline was being driven by stablecoins or retail spot trading, the CFO clearly stated it was from the higher mix of stablecoins.

The CFO stated:

“We are not breaking out or quantifying specific volume. But what I'll say is that if you exclude stablecoin impact, the mix of advanced volume was slightly higher in Q3 versus Q2. And so we did not have any change in market share, as I mentioned earlier, was relatively steady in our fiat to crypto trading volume, which is like the core of our revenue engine in here in the U.S. And so backing out stables, a little bit more on the advanced side, but the stablecoin impact was the most material contributor to that change in rate this quarter.”

Altcoin Volume:

Notably, altcoin volume declined by about 10 points in Coinbase’s overall volume, with the CFO stating this was due to lower volatility and also an increase of focus on Bitcoin and Ethereum since the ETF launches. We had looked more closely at this in the September deep dive.

Growth Markets:

The CEO highlighted the following key growth markets on the call. These growth utilities have helped to double the number of stablecoin payments and transactions volume from $10 trillion last year to over $20 trillion already this year. The market cap of USDC stablecoin has grown from $25 billion at the start of 2024 to $36 billion today, for growth of 45% YTD.

• Stablecoins, which are useful for period of high inflation. Stablecoins are also useful for moving money quickly and for cheap payments. USDC is the most popular stablecoin, yet EURC is a Euro backed Stablecoin that Coinbase now supports, extending stablecoins beyond the dollar to include Euros.
• Smart wallets, which removes the need for complicated password keys. This reduces friction and fees. Users can onboard in 8 minutes compared to 2.5 hours in the past for traditional wallets.
• Base Layer 2, which is scaling quickly and enabling 1 cent, 1 second transactions. We covered this in depth here. Base is now the #1 Layer 2 solution. It was stated that “The transactions increased 55% on Base quarter-over-quarter. It's a pretty incredible pace of growth right now.”

Legislation:

Coinbase is on the precipice of having more support in Washington. There are over 350 politicians with pro-crypto stances, causing Coinbase’s management to expect “the most pro-crypto congress ever” following the election. I’m making a note here to revisit this for our Members after the election and into 2025.

Conclusion:

For investors paying attention, Coinbase has many promising segments. However, its financials are lumpy and not for the faint of heart – but, neither is crypto. On the fundamentals side, COIN has staggering cash levels and an adjusted EBITDA margin that is quite strong. The revenue will track crypto prices, and thus, one has to consider that earnings reports lag real-time crypto asset prices and volatility.

Our strategy for this position is to use technicals. If you are interested in this stock, consider joining Knox on his webinar October 31st where he will discuss the upside setup we hope materializes, and the risk management we have in place if it does not. Also, keep an eye out for the free newsletter with an updated trade setup on Bitcoin hitting inboxes on Friday, to which Coinbase is closely correlated.

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.

Recommended Reading:

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