Proactive Investors - You have to hand it to Nasdaw-listed cryptocurrency exchange Coinbase Global Inc (NASDAQ:COIN).
Few companies are met with the same levels of vitriol and animosity from the regulators with which Brian Armstrong’s company is met.
Just this week, it emerged that the US Securities and Exchange Commission (SEC) politely requested Coinbase to cease trading in everything except bitcoin, a move that would wipe out over 60% of Coinbase’s transaction revenues in an instant.
Last month, the SEC slapped Coinbase with a lawsuit on charges of securities law violations, with the regulator alleging that since at least 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities.
Put simply, Coinbase is in the business of cryptocurrency, and the US regulators are in the business of shutting down cryptocurrency in any way they can.
Yet among these existential threats, Coinbase really isn’t doing too poorly, albeit at the sacrifice of hundreds of employees.
A bit of crafty financial reporting doesn’t hurt either.
Coinbase narrows losses and trading volumes alike
Per Thursday’s second-quarter earnings call, the group penned positive underlying earnings (EBITDA) for the second quarter in a row following three straight quarters of jarring losses.
Net profit, or lack thereof, was another story, with Coinbase chalking up another US$97 million in losses, the sixth straight quarter in a row for losses in the group.
Given Coinbase’s near 60% debt-to-equity gearing ratio, this could start to become an issue in the years ahead when long-term debts begin to mature.
However, these losses were a significant improvement on the billion-dollar-plus losses racked up by the group this time last year, thanks again to those substantial headcount reductions.
Narrowing losses aside, there is simply no way to put a positive spin on Coinbase’s rapidly declining transaction revenues and volumes.
Despite a resurgence in bitcoin and cryptocurrency prices in 2023, total transaction revenues across consumer and institutional segments in the latest quarter were 10% lower than in the third quarter of 2022, when the crypto winter started to bite and prices fell below what they are today.
Total transaction revenues in the latest quarter were barely an improvement on the fourth quarter of 2022, when the FTX armageddon sent bitcoin prices to two-year lows.
Raw trading volumes paint an even worse picture. At US$92 billion, they haven’t been this low since late 2020.
It is true that interest income has managed to offset some of these losses in the near term, but with inflation across the developed economies starting to subside, interest rates are likely to come down in 2024 and 2025 (on the plus side, that should be a net positive for crypto prices).
Staking rewards, written down on the Coinbase balance sheet as blockchain rewards, have also offset transaction revenue losses, but here too, long-term viability concerns persist.
US regulators have already clamped down on and banned rival exchange Kraken’s staking programme this year; there is little doubt that Coinbase’s programme is also in the spotlight.
It all adds up to a two-pronged existential crisis for Coinbase, with the spectre of Gary Gensler’s SEC on one prong and generally declining volumes in the cryptocurrency markets on the other.
Yet, amid these headwinds, Coinbase shares are up over 170% year to date. Not bad for a company shaping up to be a regulatory punching bag.