Coinbase released its Q4 2023 earnings report on February 15, revealing a promising outlook for the company in the upcoming year, primarily driven by Bitcoin trading. The company’s technology expenses in 2023 were $1 billion lower than the previous year, and both its net income and earnings (EBITDA) are showing positive trends.
In the past, Coinbase’s platform supported a wide range of crypto assets that attracted investor attention. However, over the last two years, both retail and institutional volumes have decreased, with Bitcoin and Ethereum emerging as the dominant favorites in the cryptocurrency space. Bitcoin has maintained a significant lead over Ethereum.
Despite the dominance of Bitcoin and Ethereum, other cryptocurrencies still contribute to almost half of Coinbase’s transaction revenues, indicating ongoing investor speculation in this area.
Stablecoins have also shown promising growth on the Coinbase platform. In a year where subscriptions and services accounted for nearly half of the company’s revenues, stablecoins alone accounted for 22%.
Retail investor transactions, which used to generate nearly all of Coinbase’s revenues, now make up less than half of its net revenue. However, the growth in subscriptions and services has offset the decline in transaction volumes over the past two years.
Custodial fees, earned when customer cash balances are invested into U.S. Treasuries or money market funds, have been declining year-on-year. This suggests that cryptocurrencies are losing traction among investors, possibly because they are not easily convertible to fiat currencies without significant costs.
However, the launch of Bitcoin ETFs this year has shown promising volume trends, with daily volumes surpassing $1 billion on most days. Coinbase is the custodian for eight of the 11 Bitcoin ETFs launched, which is expected to drive further growth for the company. However, these ETFs were not included in the earnings release since they were approved and traded after January 10. Institutional custodial fees are lower than transaction fees, so there may be some trade-offs between the two in the future.
Coinbase may face challenges in the Bitcoin ETF market as other exchanges may enter the market with their own custodial platforms. The company’s response to this challenge has not been disclosed, but significant announcements are expected in the coming year.
Cryptocurrencies other than Bitcoin and Ethereum are also attracting intense speculation due to their utility. This speculation presents additional opportunities for Coinbase. In May 2023, the company launched “International Markets” for select international customers, allowing them to trade 15 perpetual futures contracts on different cryptocurrencies. This generated approximately $10 billion in trading volume by Q3 2023.
Coinbase Financial Markets (CFM) also introduced regulated derivatives for the U.S. market in November. Derivatives markets tend to be larger than spot markets, so they are expected to be the next driver of volume and growth for the company.
The Base platform, built on Ethereum’s layer-2 (L2) blockchain, was launched in August. It aims to help Coinbase customers efficiently convert their holdings to and from fiat currencies for real-world use.
Coinbase’s CEO, Brian Armstrong, outlined the company’s “Secret Master Plan” in 2016, with the final phase focusing on enabling the building of apps for various purposes, including investing, loans, and global remittances. Remittances alone present a significant market opportunity, with billions of dollars transferred annually. The average cost to send $200 was 6.2% in Q2 2023, compared to banks’ average of 12.1%.
The Base platform is currently the fourth-largest L2 player by total value locked (TVL) on Ethereum, with $855 million in escrow. With increased exposure to international markets, Coinbase customers could benefit from a network of cryptocurrencies, stablecoins, and apps that connect with central bank digital currency (CBDC) networks in countries like Japan, India, and China. This could potentially lead to cheaper remittances using different currencies. Overall, Coinbase is well-positioned to explore numerous possibilities in the near future.
Sandeep Rao, a senior quantitative researcher at Leverage Shares and former senior research associate for Nasdaq’s Index R&D Team, wrote this article. It is intended for general information purposes and should not be considered legal or investment advice. The views expressed in the article are solely those of the author and do not necessarily reflect the views of Cointelegraph.