Coinbase’s Q1 earnings report, released on May 2, revealed that the company has been thriving in the Bitcoin (BTC) and Ethereum (ETH) market. However, the report also highlighted the potential of Coinbase’s Base platform, which could position the company as the NVIDIA of decentralized finance (DeFi).
Base, which was launched in August 2023, is an Ethereum layer-2 solution designed to scale Coinbase’s user base and make transactions faster. The company’s vision is to decentralize Base and create an open global crypto ecosystem using the security of the Ethereum mainnet.
The Q1 report showed that Base has outperformed its competitors, especially after the rollout of Ethereum’s Dencun upgrade. DeFi crypto exchanges on Base saw daily trading volumes surpass $1 billion, narrowing the gap between Base and Coinbase’s main centralized exchange.
The Dencun upgrade significantly increased activity on Base, resulting in a surge in daily transaction volume and revenue. It also reduced costs for layer-2 scaling chains like Base, leading to increased user engagement.
Since the upgrade, Base has consistently processed more than 3 million transactions daily, generating substantial fee revenue. If this pace continues, Base could become a significant growth driver for Coinbase, surpassing other major Ethereum scaling networks in terms of fees earned.
Base’s revenue spike is attributed to its support for DeFi protocols, with approximately 250 protocols currently operating on the network. This rapid rise in market share demonstrates Base’s potential and solidifies Coinbase’s position as a long-term industry leader in DeFi.
Looking ahead to Q2, the outlook for cryptocurrencies may shift towards macroeconomic factors such as interest rates, inflation, stock market trends, and geopolitical tensions, now that Bitcoin’s halving has passed. Coinbase provided positive guidance for Q2 but noted that results will depend on crypto prices. If prices continue to decline, the second quarter may be weaker than the first.
Coinbase’s revenue from transactions accounts for roughly half of its net revenue, with the other half coming from non-transaction revenue sources like subscriptions, services, custodial fees, blockchain rewards, and interest income. The company acts as the custodian for eight of the 11 new Bitcoin ETFs launched in January, which have reached approximately $60 billion in assets under management in Q1 2024. As the assets under management in these ETFs increase, Coinbase’s custodian fees will rise as well.
Base has the potential to offset any future declines in trading volumes for Coinbase, thereby reducing its correlation to cryptocurrency prices. This additional revenue stream could positively impact Coinbase’s share price in the future.
Although short-term declines in crypto prices may affect Coinbase’s share price, the overall potential for growth in the crypto market, especially with the introduction of Bitcoin ETFs in the United States, Hong Kong, and potentially Australia, will support Coinbase’s transaction and non-transaction revenue in the long run. Coinbase’s diversification of revenue drivers is likely to lead to higher share prices in the long term.
In conclusion, Coinbase’s Q1 earnings report highlighted the success of its Base platform and the potential for it to become a major player in decentralized finance. Despite short-term challenges, the company’s diversification and support from the growing crypto market position it for long-term success.