Coinbase Global Inc. (COIN, Financial) reported second-quarter earnings on Aug. 10, exceeding both revenue and earnings estimates set by Wall Street analysts. Despite volatile cryptocurrency prices, the company benefited from an increased trading volume that helped it add many new monthly transacting users.
The company reported earnings per share of $6.42, beating analyst expectations of $2.33. It also announced a partnership with PNC Financial Services Group Inc. (PNC), adding to the growing number of financial institutions that are now offering crypto products to their customers.
Exhibit 1: Coinbase monthly transacting users
Source: Coinbase.
Despite short-term headwinds resulting from regulatory scrutiny, Coinbase seems well positioned to deliver handsome returns to long-term investors.
Second-quarter earnings recap
Coinbase reported $2.23 billion in revenue, with $1.9 billion in transaction revenue and $103 million in subscription and services revenue. Net income came in at $1.6 billion, up 4,900% year over year. The total trading volume was $462 billion, up 72% quarter over quarter. Retail monthly transacting users surged by 44% to 8.8 million, and total verified users increased to 68 million. The company continues to expand into the international market and obtained licenses in Japan and Germany to grow its footprint.
Exhibit 2: Retail and institutional transaction revenue
Source: Coinbase.
Commenting on the strong second quarter, CEO Brian Armstrong said:
βQ2 was a really strong quarter for us. We had amazing growth in terms of users added to the platform, assets on the platform, revenue, just about everything. And also, great diversification across our revenue lines and users. So this is really good to see. More and more people are using crypto and using the Crypto Economy, individuals, businesses, developers all over the world. Now, it's important to remember that just because we had a strong quarter, we at Coinbase, always think about longer-term cycles of crypto.β
The success of Coinbase is linked to the performance of digital assets such as bitcoin. Around the time of the company's listing, cryptocurrency prices reached an all-time high of more than $64,000, but have subsequently fallen to around $45,000. The price dip in bitcoin came with the legislative crackdown in China on cryptocurrencies and mining, as well as mounting concerns about the environmental impact of digital currencies. Elon Musk changed his decision to accept bitcoin as a form of payment for electric vehicles in May, citing bitcoin mining has detrimental environmental effects. In China, financial institutions have been ordered not to accept cryptocurrencies as a mode of payment, so the short-term outlook is bleak.
Highlighting the impact of bitcoin price volatility on corporate earnings, Coinbase wrote in its quarterly shareholder letter:
βQ2 illustrated the volatility we have anticipated in these still-early days in the crypto-economy. In Q2, we saw many crypto asset prices reach new all-time highs. For example, the price of Bitcoin surpassed $64,000 in April, while Ethereum prices more than doubled during the quarter to over $ 4,200 in May. Later in the quarter, we saw a steep decline in crypto asset prices with Bitcoin and Ethereum falling over 45% each to ~$30,000 and ~$1,700, respectively, resulting in exceptionally high levels of volatility. As volatility and crypto asset prices are highly correlated with trading revenue, the crypto market environment heavily influenced our Q2 financial results.β
Exhibit 3: Trading volume breakdown
Source: Coinbase Shareholder Letter.
Regulatory risks continue to be a major concern for Coinbase and other crypto platforms not only in China, but in most parts of the world. Governments are resisting cryptocurrency adoption for several reasons, including concerns that decentralization will result in policymakers losing control of the monetary system, as well as concerns about illegal activity and cybercrimes.
Commenting on the regulatory concerns, Armstrong said:
βI think we've always welcomed sensible regulation in this space. We basically just want to be treated on a level playing field with any other traditional financial services companies out there. And I think unlike maybe some traditional tech companies that have waited for something bad to happen, then they reluctantly go engaged with the government, I think we view it as our role to go out there proactively before any issue comes up, be that educational resource and advise world leaders and finance ministers on how they can adapt their economies to capture the opportunity in front of the crypto economy. Central Bank digital currencies are a hot topic, competitiveness with China, which is really kind of taking a lead on this. And So it's about shifting people's mentality from thinking about crypto as a set of risks they have to deal with to thinking of it as an opportunity. And yes, we can mitigate those risks, but that's actually not the most important thing in front of us. So that's what we're doing on the policy side.β
There are many uncertainties regarding the short-term prospects for Coinbase, and the company is likely to report wildly fluctuating revenue and earnings over the next few quarters. That being said, investors should ideally focus on the long-term outlook for the company.
Coinbase is tapping a lucrative market opportunity
Coinbase is the most popular cryptocurrency exchange in the United States, as well as the first significant crypto-focused company, with more than 80 cryptocurrencies available on its platforms for retail investors. The crypto market is still in its infant stages, and Coinbase is well-positioned to prosper as demand for cryptocurrencies and digital assets are likely to grow in the long run due to technological advancements and increasing security.
Even though the price of Bitcoin has dropped, it still has the largest market capitalization among any virtual currency, and Ethereum is the second-most-valuable cryptocurrency by market capitalization. According to Facts and Factors Marketing Research, the worldwide cryptocurrency trading market will increase at a compounded annual growth rate of 30% through 2026. The transparency of blockchain technology, growing acceptance of digital assets in developing nations and a considerable increase in venture capital investments will be crucial growth drivers for the cryptocurrency market.
Although the long-term outlook is promising, Coinbase warned of a possible decline in the number of monthly transacting users in the third quarter. Commenting on this expectation, the company wrote:
βIn July, retail MTUs and total Trading Volume were 6.3 million and $57.0 billion, respectively, as crypto asset prices and crypto asset volatility declined significantly relative to Q2 levels. August month-to-date, retail MTUs, and Trading Volume levels have slightly improved compared to July levels but remain lower than earlier in the year. As a result, we believe retail MTUs and total Trading Volume will be lower in Q3 as compared to Q2.β
Investors will likely have to weather substantial volatility in both earnings and stock prices before the industry matures, allowing Coinbase to report consistently growing revenue and profits.
Takeaway
Coinbase noted the volatile nature of cryptocurrencies will continue in the near future, resulting in uncertain quarterly financial performance. The company has played a key role in promoting digital currencies to a wider audience, and because of its efforts to simplify the crypto trading process, it has become the top platform for American investors interested in digital currencies. Coinbase appears to be a good investment for patient investors who are willing to weather high volatility.
