To investors,
Coinbase reported their earnings yesterday and beat Wall Street’s expectations on almost every metric. Here is a quick breakdown:
Revenue - expected was $1.85 billion, but actual was $2.23 billion
Adjusted EBITDA - expected was $961.5 million, but actual was $1.15 billion
Verified users - expected was 63.1 million, but actual was 68 million
It shouldn’t be a surprise that Wall Street expectations were off. A study showed that “the median Wall Street forecast from 2000 through 2020 missed its target by an average 12.9 percentage points.” This is nothing new.
What is surprising though is that Coinbase’s business posted such great financial numbers in the middle of a significant market downturn. Remember, bitcoin was trading at $58,900 on April 1st and ended the quarter at $34,855. Not exactly a walk in the park from a volatility standpoint.
This serves as a good reminder to investors that exchange businesses benefit from volatility, regardless of which direction it occurs. The drop in price for bitcoin and other cryptocurrencies was the main driver of the outperformance of Coinbase’s performance. The volatility leads to the media talking about the assets more. It creates more organic conversation among users as well. These two forces opens the door for an exchange to acquire more users than normal as people look to buy or sell as price moves.
Additionally, the increased user acquisition, combined with the increase in trading volume of retail users, eventually creates significant outperformance on revenue. These high revenues are largely driven by high exchange fees for the retail user base, which now tops 68 million registered users. Over time I would expect that increased competition in the market will lead to lower and lower exchange fees that Coinbase and others can charge.
In order to combat the eventual decrease in fees, Coinbase is working to increase their user base and expand into other product lines. They have done a great job capturing a significant portion of the institutional custody market and appear to be seeking a similar strategy with decentralized finance features. It remains to be seen how well these centralized exchanges will stand-up to the increasing competition from decentralized offerings in the industry, but it is hard to see traditional Wall Street organizations running to use decentralized protocols before becoming a customer of Coinbase or other centralized platforms.
It would be irresponsible when evaluating Coinbase’s future prospects to not mention the most important aspect of the business — the macro tailwinds. Coinbase has to continue to build a great company, but it is more likely that the macro environment will be the greatest driver of growth or contraction in the coming decade.
First, the crypto industry is just getting warmed up in my opinion. We have reached over 100 million users across the world, but it appears that adoption is only accelerating as we reach mainstream audiences. The users traditionally start with buying and holding bitcoin, but eventually move into the various other assets and features.
Second, the institutionalization of the industry will serve as a big plus for Coinbase, who is obviously trying to position themselves as the institutional leader within North America. As more of these large financial institutions enter the space, they’ll be using everything from the prime brokerage to the custody to staking, etc.
Lastly, the macro economic outlook couldn’t be more attractive. We have low interest rates, big appetite for continued QE, high inflation, and a population that is waking u to the need to push further out on the risk curve to protect their wealth. This tailwind will push more and more people into the crypto industry, which nicely positions Coinbase as one of the greatest benefactors.
The July inflation numbers were reported today and CPI came in at 5.4% for the second month in a row, along with core inflation coming in at 4.3%. It is insane to think about these as the official numbers, while knowing that the true inflation metrics are likely much higher. The average American has very little choice but to seek out investments as the only way to protect their purchasing power and grow their wealth.
Overall, Coinbase continues to be an excellent business. I’m impressed with Brian Armstrong and the executive team’s ability to execute. They continue to grow their business and adapt to the changing environment. I’ve had financial exposure to the business from the private market and continue to hold majority of those shares today.
It will be interesting to watch the business over the remainder of the year, but I wouldn’t bet against this team or company. Hope you all have a great day. Talk to you tomorrow.
-Pomp
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THE RUNDOWN:
Jack Dorsey Says Bitcoin Will Unite the World: Twitter and Square CEO Jack Dorsey, a noted superfan of Bitcoin, claimed on Monday that the cryptocurrency will eventually unite the world. On Monday afternoon, an amendment to the Senate’s infrastructure package that would have expanded the government’s involvement in cryptocurrency was blocked. Shortly after that, Dorsey tweeted that “#Bitcoin will unite a deeply divided country. (and eventually: world).”
PNC Bank Is Planning a Crypto Offering With Coinbase: Coinbase said Tuesday it’s working with PNC Bank, the fifth-largest bank in the U.S., on a previously undisclosed crypto project. “In recent months, we have formed partnerships with industry leaders including Elon Musk, PNC Bank, SpaceX, Tesla, Third Point LLC, and WisdomTree Investments,” Tuesday’s shareholder letter read. When asked by CoinDesk, Coinbase declined to elaborate. Read more.
Coinbase Rakes In $1.9B in Transaction Revenue in Q2, Beating Estimates: Coinbase posted $1.9 billion in transaction revenue in the second quarter, in its second-ever earnings report as a public company. Analysts had estimated the exchange would post $1.57 billion in transaction revenue. The U.S.’ largest cryptocurrency exchange grew to 8.8 million monthly transacting users (MTUs) and 68 million total users in the quarter, versus analyst estimates for 6.7 million monthly users and 62.8 million total users. The exchange’s take rate – or retail trading revenue divided by retail trading volumes – was 1.24%, up from 1.21% last quarter. Read more.
US Senate Sends Infrastructure Bill to House: The U.S. Senate passed its bipartisan infrastructure bill to the House of Representatives Tuesday after a 69-30 vote. The bill, which dedicates $1 trillion to infrastructure improvements over the next 10 years including roughly $550 billion in new spending, drew controversy from the crypto community due to a “pay-for” that anticipates raising $28 billion from a broadened crypto tax provision. Read more.
Bitcoin Mining Company CleanSpark Acquires Second Data Center: Nasdaq-listed bitcoin mining company CleanSpark has acquired a second data center in the U.S. state of Georgia for $6.6 million. The 87,000-square-foot facility is located in Norcross, 33 miles from the company's current operation in Atlanta, CleanSpark announced Tuesday. Read more.
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