Coinbase’s Revenue Evolution: Beyond BTC Trading

With the recent approval of spot bitcoin ETFs, analysts speculate on potential impacts on Coinbase’s revenue from bitcoin trading.

Coinbase was established in 2012 to enable the purchase and sale of Bitcoin using bank accounts in the United States. Several new revenue streams later, and twelve years later, its fate continues to be intricately intertwined with that of the largest cryptocurrency.

The sanction of spot bitcoin ETFs by the Securities and Exchange Commission (SEC) further strengthened this dependence.

While Coinbase receives custodial fees for a number of the ETFs, the expansion of the new trading products may come at the expense of Coinbase, according to some analysts.

However, despite the SEC’s persistent effort to criminalize the trading of various non-bitcoin tokens on the company, bitcoin trading appears to remain an unaffected factor in Coinbase’s business operations.

Nevertheless, the Bitcoin exchange is no longer as critical to Coinbase as it once was. Trading commissions comprised significantly more than 80% of the firm’s quarterly revenues in both 2020 and 2021.

This changed when Coinbase expanded its partnership with stablecoin issuer Circle and staking operations.

Currently, transaction fees comprise nearly half of the company’s revenue, with bitcoin accounting for 38% of those fees in the third quarter. Notwithstanding this, these alternative sources of income encounter significant hazards.

The interest earned on the company’s USDC reserves is a significant source of revenue for the company. The Treasury supports the USDC yield of 5.1% offered by the company.

Coinbase’s stablecoin revenue could be impacted by a prospective decline in U.S. interest rates, according to Dessislava Aubert, an analyst at the cryptocurrency research firm Kaiko.

In 2023, 11% of Coinbase’s revenue was generated from blockchain rewards, which included remuneration for staking tokens to secure blockchains. Coinbase has made risking a significant component of its diversification strategy, whereby users may stake their tokens in return for yield.

Staking is a target of the SEC’s ongoing legal dispute with Coinbase. If a motion to dismiss the SEC’s litigation against Coinbase is denied, the company risks incurring legal expenses, discontinuing its staking services, and potentially being unable to trade certain altcoins.

However, Coinbase’s capability to facilitate the passage of investments into and out of Bitcoin is not being questioned.

Impact of Bitcoin ETFs on Coinbase’s Revenue

Certain analysts believe that the long-awaited approval of spot bitcoin ETFs, which introduce competition to Coinbase’s bitcoin trading business, threatens the company’s revenue from bitcoin trading.

Almost all ETFs are held in the company’s custody, but due to the race to the bottom on ETF fees, the amount the company collects for custody would be less than the amount it earns on trading fees on its exchange.

The company spokesperson, when contacted for comment, referenced the following statement from CEO Brian Armstrong during a post-ETF approval appearance on CNBC:

“We anticipate generating revenue as the custodian of ten out of the thirteen ETFs. However, our current clientele within our retail application not only desires awareness of Bitcoin but also intends to utilize it for various purposes.” They wish to use the remaining crypto assets for Web3 and decentralized identity, commerce, and staking.

Equity research firm Oppenheimer predicted in a report on the company dated January 25 that the overwhelming majority of retail investors would maintain their bitcoin positions on the platform due to the abovementioned factors Armstrong outlined, in addition to the company’s annual fee-free status.

Additionally, the demand for custody services will be influenced by the price of bitcoin’s sustained ascent, a pattern predating the establishment of the company.

“One of the most significant determinants of their revenue heading into 2024 is the price of cryptocurrencies, specifically bitcoin,” said Violeta Todorova, senior analyst at Leverage Shares.