Coinbase, the second-largest crypto exchange by trading volume, released its Q3 2023 earnings on Thursday, giving shareholders and market participants an opportunity to see what’s going on under the hood. In response to the report, the company’s stock is down about 5.5% in after-hours trading.
In the third quarter of 2023, Coinbase generated $674 million in total revenue, down from $707.9 million in the previous quarter. The company’s net revenue was $623 million, down 6% from Q2 2023, but up from $576 million one year ago. The company’s net loss totaled a slim $2 million in the three-month period on a GAAP basis, worth –$0.01 per share. The company also reported an adjusted EBITDA result of $181 million.
Analysts were hesitant with estimates even amid a recent crypto market upswing. Messari analysts estimated Coinbase to report $616 million, a 7% decrease from the previous quarter, lower than the consensus expectation of $650 million.
The Zacks-Consensus-Estimate expected Coinbase to report $650.8 million in revenue and earnings per share of negative 54 cents per share, according to a report provided by Yahoo Finance.
Before its Q3 earnings were released, Coinbase’s stock had risen 148% year-to-date. While that’s a pretty large rally in a bear market, the value of Coinbase’s stock was still down 27% from the 52-week high of $114.43.
Overall crypto market capitalization has risen about 62% to $1.28 trillion since the beginning of the year and is up from $1 trillion one year ago. However, recent gains to the value of crypto assets and a constituent rise in trading volume did not mean that Coinbase’s Q3 numbers were impressive when we consider trade-based revenues.
In the third quarter, Coinbase generated $288.6 million worth of trading revenue, with $274.5 million coming from consumer activity and another $14.1 million from institutional traders. Those figures were down from $310 million and $17.1 million in the second quarter of 2023, and $346.1 million and $19.8 million, respectively, in the year-ago period.
If trading top line was down at Coinbase, how did the company manage to post growth compared to the year-ago period? The answer is: interest-based incomes.
Other revenue sources
Coinbase had an outlook of “at least $300 million” in August for its subscription and services revenue, and exceeded that estimate by $34 million in Q3 with a final result of $334.4 million. That figure was down slightly from the $335.4 million it reported in its sequentially preceding quarter.
The biggest increase for this category came from stablecoin revenue, up about $21 million quarter-over-quarter, to $172.4 million, which is derived from its arrangement with Circle and USDC. The primary driver for its rise was higher interest rates, the shareholder letter stated. In Q3, Coinbase had about $2.5 billion in on-platform USDC balances, up from $1.8 billion at the end of Q2.
Non-trading revenue is a growing tailwind for Coinbase. As a crypto exchange, it historically generated most of its revenue from trading fees, but that trend has changed in recent quarters as the general retail trading appetite has fallen amid an ongoing crypto winter. Still, Coinbase’s shareholder letter said it expects the fourth-quarter subscription and services revenue to be flat with Q3, which would also put it closely in line with Q2, too.
In August, Coinbase’s blockchain, Base, launched to the public and saw massive growth as a number of projects and developers flocked to the platform to build applications. This initiative is one of many launches by the exchange to expand beyond its current offerings in an attempt to diversify its revenue streams.
But with this growth there also comes greater regulatory oversight. In June, the SEC sued Coinbase for allegedly violating federal securities laws. In August, the exchange filed a motion with a federal judge to dismiss the suit, and in October, the agency followed up requesting the judge to deny it.
Looking ahead
It’ll be interesting to see if the recent rally from big cryptocurrencies like bitcoin and Ethereum hold up and impact Coinbase’s trading revenues further and if institutional interest continues to grow for the exchange amid potential for a spot bitcoin ETF application approval from the SEC.
Rising incomes and slack trading revenues could change in the current quarter. The company told investors that it “generated approximately $105 million of transaction revenue” in October, putting it on a faster pace than we saw on average in the third quarter. Coinbase could therefore see its trading-based revenues rise in the fourth quarter, if current trends hold.
Still, with the company nearly breakeven on a GAAP basis and comfortably profitable on an adjusted basis, it’s hard to be too irked with its performance; what more could we expect during a crypto downturn?
The most bearish thing we can summon is that Coinbase is skating atop a wave of rising interest-based incomes, but as that holds true for most fintech companies that we track, it’s far from alone in enjoying more revenues from its holdings. All told, Coinbase did a little bit better than expected, and it has the beginnings of a slightly better Q4 under its belt. Things could be worse.