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.
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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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