The crypto exchange released its Q2 financials on Thursday and acknowledged lower spot trading volumes but also celebrated achieving better crypto regulatory clarity and becoming the crypto ETF custodian of choice.
Posted August 1, 2024 at 5:31 pm EST.
Coinbase, the U.S.’s largest cryptocurrency exchange, reported 2024 second-quarter revenue of $1.4 billion, edging out analyst estimates and marking the exchange’s third straight quarter in the black. Revenue fell 11% compared to Q1 results of $1.6 billion, but was still 47% higher than the $954 million generated by the company in Q4 2024.
Overall net income for the quarter was $36 million, including a recognition of $319 million in pre-tax crypto asset losses, the “vast majority of which were unrealized,” according to the company. Coinbase was required to recognize these losses because crypto prices were lower on June 30, 2024 compared to March 31, 2024.
Lower trading volumes and less volatility within the cryptocurrency industry were mostly responsible for the dip in revenues, most likely due to some of the increased trading activity that peaked in March shifting to the hugely successful spot bitcoin exchange-traded funds.
Coinbase, which relies on trading commissions for a large portion of its revenue, also reported progress in its efforts to diversify its top line. Transaction revenue in Q2 was $781 million, down 27% compared to Q1, while subscription and services revenue grew 17% to $599 million.
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In its Q2 shareholder letter, the company said it expected Q3 subscription and services revenue to be in the $530-$600 million range, due to “modest headwinds” such as a decline in ether prices, expectations of an interest rate cut in September, and an increase in expenses related to its promotion of the USDC stablecoin.
Coinbase’s stock was up 2.8% to $217.76 in after-hours trading following the release of its Q2 results. Shares fell about 5% during the day’s trading, amidst a wider drop in U.S. stock markets. The stock is up 22% year to date and 134% over the past year.
The company is hosting an earnings call with analysts at 5:30 p.m. ET.
Base’s Progress
Coinbase’s layer 2 solution, Base, was the star on the company’s Q1 earnings call, and continues to be Ethereum’s top layer 2, seeing a fourfold increase in transaction volume from the first quarter to the second quarter, according to the company’s Q2 shareholder letter.
“Our work with Base to improve efficiency and lower costs resulted in 300% Q/Q growth in the number of transactions processed,” the letter says.
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Base generates revenue by batching transactions and relaying them to the Ethereum blockchain for a fee. At one point, it was generating more than twice the number of transactions processed by the Ethereum blockchain itself.
Regulatory Clarity
One key message from the Q2 shareholder letter was Coinbase’s success in “achieving regulatory clarity.”
“We have seen crypto legislation become a mainstream issue, garnering bipartisan support,” the letter says. “There is real energy within both the House and the Senate to pass meaningful legislation.”
Last week at the 2024 Bitcoin Conference in Nashville, Tennessee, former President Donald Trump made headlines when he promised to fire U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler as a first step towards more favorable crypto regulation, should Trump win the November presidential election. He also promised to set up a bitcoin fund that would act as a strategic reserve for the country.
Read more: Trump Has Made Promises to Crypto Voters. If He’s Elected, What Could He Actually Do?
Right after Trump’s keynote speech at the conference, Wyoming Republican Senator Cynthia Lummis took the stage and announced a plan to purchase a million bitcoin in five years. She has since published the draft legislation on her website.
Meanwhile, presumptive Democratic presidential candidate Kamala Harris was reported to be working on a “reset” of the party’s crypto policies, which have widely been viewed as being antagonistic under President Joseph Biden’s administration. The Financial Times reported that as part of this reconsideration of its policies, Harris had met with Coinbase representatives, as well as those from stablecoin issuer Circle and blockchain payments firm Ripple Labs.
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Despite the shift in flows towards spot crypto ETFs, Coinbase, as the custodian of choice for almost all crypto ETF issuers, also stands to benefit (spot ETFs for the second-biggest cryptocurrency by market cap, ether, began trading in July).
Coinbase is the custodian for ten of the eleven spot bitcoin ETFs and eight of the nine newly launched spot ether ETFs. The company’s dominance in the area is so notable that many are highlighting it as a source of centralization risk for the industry.
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“Most Bitcoin ETFs plan to custody their Bitcoin at Coinbase,” wrote Gabor Gurbacs, former director of digital asset strategy at investment firm VanEck and founder of Pointsville, at the beginning of the year. “This is good business for Coinbase … It’s also an enormous responsibility and pooling of counterparty risk.”
The exchange charges a baseline custody fee of 0.2% of assets, with add-on fees of up to an additional 0.2%, according to reporting from The Motley Fool. These fees can really add up, especially considering that, cumulative spot bitcoin ETF volumes have reached around $350 billion, according to data from The Block.
However, custody fees from ETFs currently represent a small portion of the exchange’s revenue.
“Custodial fee revenue was $35 million, up 7% Q/Q. The primary driver of the Q/Q growth was higher average crypto asset prices in Q2 compared to Q1,” the letter reads. “To a lesser extent, we benefited from native unit inflows related to our role as the custodian on BTC ETF products.”
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