As America’s only publicly traded crypto exchange, Coinbase’s financials are closely watched by market analysts as an indicator of the sector’s overall health.
In the third quarter of 2023, Coinbase reported $674M in total revenue and an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $181M, beating expectations despite declining trading volumes on the platform.
In Q3 2023, Coinbase’s consumer trading volumes came in at $11B, 17% lower than the previous quarter and less than half of the $26B recorded in the same period last year. Meanwhile, institutional trade volume amounted to $65B in the three months to October, representing a 21% quarterly decline.
Of course, Coinbase isn’t the only exchange struggling with low trading activity. In September, Bitcoin trade volumes fell to a 6 year low. Ether and derivatives markets have also suffered from consecutive months of declining activity.
Yet, despite the considerable reduction in crypto trading this year, there are still reasons for Coinbase shareholders to be optimistic.
In a letter to shareholders, the company wrote that “Q3 was a strong quarter for Coinbase.”
“While we have generated a net loss through Q3, we are on track to deliver meaningful positive Adjusted EBITDA for 2023,” it added. Previously, the firm had only targeted improved but not positive earnings for the year.
But with such low trade volume, how has Coinbase managed to improve its outlook for 2023? The answer lies in the platform’s revenue diversification strategy
Although Coinbase has historically generated most of its income from trading fees, subscriptions, and services have become an increasingly important revenue stream for the platform.
Over a year later, Coinbase is now tantalizingly close to realizing Armstrong’s vision, with 49.6% of Q3 revenues derived from subscriptions and services.
Of these, $172.4M came from interest Coinbase earns on USDC reserves as part of its arrangement with Circle.
As the only revenue stream that increased in the most recent quarter, USDC interest has become an increasingly important source of income for Coinbase. In turn, with Circle recently closing consumer mint accounts, institutional partners like Coinbase are now critical for distributing its stablecoins to end users.
The primary driver of the increased stablecoin revenue was higher interest rates, Coinbase stated. However, the total value of USDC balances on the platform also increased from $1.8B at the end of June to $2.5B at the end of September.
An advantage of the shift to service-based revenues is that it can help insulate Coinbase from volatile crypto markets.
As the company’s letter to shareholders explained, multi-year low levels of volatility dampened transaction volumes, driving revenue down in turn. According to Coinbase, in Q3 2023, crypto asset volatility reached the lowest level the company has measured since 2016.
Meanwhile, service fees present a more sustainable and predictable source of income that is less tied to the state of the market.
Although income from services and subscriptions climbed to nearly half of Coinbase’s total revenue in Q3, the increase wasn’t driven by growth, but by shrinking transaction revenue.
If a bull market ends up dominating the fourth quarter, trading volumes will likely soar, boosting transaction-based revenues for exchanges like Coinbase. And while shareholders would no doubt welcome this, it would also somewhat validate the platform’s efforts to build more stable income streams.