Coinbase says ‘crypto’ needs ‘scalability’ but exchange still shuns BSV

Coinbase (NASDAQ: COIN) lost over $2.6 billion in 2022 as America’s largest cryptocurrency exchange saw revenue fall over 57% from the previous year.

Figures released Tuesday show Coinbase generated revenue of just under $3.15 billion last year, down from $7.35 billion in 2021. Adjusted earnings fell from $4.09 billion in 2021 to a loss of $371 million last year, while 2022’s net loss came in at $2.625 billion compared to a net profit of $3.62 billion in 2021.

Coinbase booked a net loss in each quarter last year, with Q2’s $1.1 billion loss being the worst offender. As Coinbase’s earnings statement dryly observed: “2022 was a challenging year for crypto markets and our transaction revenues.”

The bulk of 2022’s revenue continued to come from commissions on customer trades, although last year’s $2.356 billion was only one-third of 2021’s total. Consumer (retail) trading revenue slipped 65.5% to $2.237 billion, while institutional trading was off a similar percentage to $119.3 million.

Subscription and services revenue fared better, rising 53% year-on-year to $792.6 million. This rise came entirely from blockchain rewards ($275.5 million, +23.4%) and interest income ($327 million, +1,1,67%). Meanwhile, custodial fee revenue fell 41.4% to $79.8 million, and ‘other’ revenue—including the Learning Rewards program that was rebranded from Earn—fell 16.6% to $110.3 million.

For Q4, total revenue was $604.9 million, less than one-quarter of Q4-2021’s total. Trading revenue was a mere $322.1 million—down 12% from Q3-2022 and the lowest quarterly figure last year. But subscription and services had its best quarter to date at $282.8 million, thanks entirely to interest income spiking 79% from Q3 to $182.2 million, while all other elements in this segment reported negative sequential growth.

Coinbase shares closed Tuesday down nearly 5% to $62.07, roughly twice their value when 2023 began but well off their year-to-date peak of over $81 earlier this month. Coinbase CEO Brian Armstrong sold another $1.7 million worth of his Coinbase shares on February 16, bringing his year-to-date sales total to over $12.5 million.

Trading places

2022’s cavalcade of crypto collapses poured a big old bucket of ice water on consumer sentiment, as retail trading volume fell from $535 billion in 2021 to just $167 billion last year. Retail volume in Q4 was a mere $20 billion, a nearly 89% reduction from Q4-2021 and also down 23% from Q3-2022.

By contrast, institutional trading volume was down a comparatively modest 41.6% for the year, but the Q4 decline was a more pronounced 73.4% year-on-year. On the bright side, institutional volume fell a modest 6% from Q3 to Q4.

Last year’s alt-coin carnage allowed BTC and ETH to regain some trading market share. BTC’s slice of 2022’s overall trading rose five points to 29%, while ETH gained four points to 25%. The comparison from Q4-2021 to Q4-2022 was even starker, with BTC up 19 points to 35% while ETH gained 17 points to 33%.

While the composition of assets held on the Coinbase platform at the end of 2022 was largely unchanged from 2021, the total worth of those assets fell 71% to $80 billion, evenly split between retail and pro traders.

You have our interest

Coinbase’s interest income partly came from higher rates on fiat currency held on behalf of customers. But the vast majority of interest income came from Coinbase’s close ties to USDC, a stablecoin issued by Circle via the Centre consortium, in which Coinbase is a partner.

Last October, Coinbase entered into an agreement with the MakerDAO community under which Coinbase would safeguard the community’s vast holdings of USDC as part of the exchange’s rewards program. At the end of Q4, Coinbase held around $2 billion of USDC, of which $861 million was ‘corporate owned.’

While blockchain rewards revenue suffered a 1% quarter-on-quarter decline, it still represented 10% of overall revenue (3% of net revenue after rewards payouts). Moreover, all tokens Coinbase supports for staking saw rises in native unit staking balances, meaning the revenue decline was primarily due to declines in staked tokens’ fiat value.

Coinbase’s increasing reliance on its subscription/services segment is all the more concerning given increased scrutiny from U.S. regulators, including the Securities and Exchange Commission (SEC). Earlier this month, the SEC imposed a $30 million fine on rival exchange Kraken, which agreed to halt its customer staking programs on the grounds that the SEC viewed them as unregistered security products.

Armstrong was hot out of the gate with a blanket declaration that none—none!—of Coinbase’s products are securities. But with SEC boss Gary Gensler showing no signs of letting up—and Kraken having rolled over without any fight—Armstrong will have to be willing to do more than author tetchy blog posts and tweets if he wants to preserve this crucial revenue stream.

It’s all good…unless it ain’t

Looking at the current quarter, Coinbase said the market has improved from Q4, with transaction revenue of $120 million in January. While the fiat price of tokens such as BTC has enjoyed a recent surge, most of this is due to traders on the Binance exchange frantically converting their suddenly unstable BUSD stablecoins into BTC (along with the traditional BTC wash-trading that front-runs public disclosure of more Binance illegality).

On Monday, the Bank for International Settlements (BIS) released a report titled Crypto shocks and retail losses, concluding that most retail traders “in nearly all economies” have lost money on their BTC holdings. Worse, “larger investors probably cashed out at the expense of smaller holders,” meaning once-bitten retail traders may not be chomping at the bit for another go-round in 2023.

All of this makes Coinbase even more reliant on its subscription and services revenue, which it estimates will total $300-325 million in the current quarter. Again, that’s assuming the SEC doesn’t shut down the whole enchilada next week.

The call

Coinbase’s Q4 report emphasized the belt-tightening moves the exchange has taken to weather the current fiscal storm, including two rounds of serious payroll trimming. Asked on the earnings call about the mood among remaining staff, Armstrong said many of them had been through crypto bear markets before, leaving them “relatively unphased.”

Continuing his ‘this is fine’ approach, Armstrong repeated his usual mantra of how much he “appreciates” crypto down cycles because “people in it for the wrong reasons kind of wash out” and that “a lot of the best innovation happens in down markets.”

Clearly, last spring wasn’t yet ‘down’ enough to inspire Coinbase’s innovators, as its oft-ridiculed NFT marketplace—which launched last May— continues to resemble a ghost town. On February 1, Coinbase announced it was “pausing creator Drops on the NFT marketplace” while emphasizing that it was “not shutting down” the whole NFT offering.

On Tuesday, Coinbase president/COO Emilie Choi reiterated that the company wasn’t yet “throwing in the towel” on its NFT market, in part because—if it wasn’t already obvious—they had a “very lean team” assigned to the project. Choi added that the company’s goal was to create “a more social customer NFT experience,” a tall hill to climb when there’s no one there to socialize with.

Armstrong and his legal eagle Paul Grewal offered much of their usual bluster regarding U.S. regulators and issued the now-standard threats about crypto companies fleeing the U.S. for more tolerant jurisdictions. They seem oblivious to the fact that many in the regulatory and political spheres would be only too happy to see them and their ilk go, meaning this is far less of a threat than Armstrong understands.

You blew it, Brian

Longtime CoinGeek readers may think we’re occasionally a little rough on Armstrong, but honestly, crypto’s Lex Luthor is among the most unserious individuals this sector has to offer.

Consider this response Armstrong offered to a pre-selected question (allegedly) posed by Coinbase shareholders prior to letting the analysts speak. Asked what role Coinbase is playing in bringing crypto to the mainstream public, Armstrong said his goal was to have one billion crypto users around the globe.

Among the issues that need to be resolved before that billion-user mark can be achieved is “scalability. We need to get the blockchains to be more scalable.” Armstrong says Coinbase has “a big important role to play in that.”

Coinbase is indeed playing a big important role, at least if preventing blockchain scalability is the goal. Remember that Coinbase has never listed the Bitcoin SV (BSV) token despite its blockchain having made by far the most advances on the scalability front. These are concrete, verifiable achievements, not theoretical whiteboard aspirations.

Also, remember that Coinbase sought to list virtually every token available until evidence of rampant insider trading on these new token listings became impossible to ignore, either by the SEC or courts of law. But throughout, BSV never got a second look from crypto’s benevolent buddy Bri.

That’s because Coinbase is a ‘platinum member’ of the Crypto Open Patent Alliance (COPA), a group founded in 2021 to ‘defend’ its members against the perceived threat posed by BSV supporter Dr. Craig Wright, the real-world figure behind Satoshi Nakamoto, the pseudonymous creator of Bitcoin.

Recall that before Coinbase’s direct listing on the Nasdaq that same year, the ‘material risks’ section of its prospectus cited “the identification of Satoshi Nakamoto … or the transfer of Satoshi’s Bitcoins” among the major incidents that could spell trouble for the overall crypto sector and Coinbase’s share price.

Let’s face it. Whatever Armstrong might tell himself when he lays his head down in his $133 million California mansion, the reality is he runs a casino. He’s not interested in a token like BSV, which aims to be the fuel that sparks entirely new business models based on nano-payments. The only tokens Armstrong’s interested in are those with so little purpose, the only thing users can do is continually shove them toward one of Armstrong’s dealers and yell, “let ‘em ride!”

Face it, Armstrong…You had your chance to do something beneficial to anyone other than yourself, and you blew it.

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