Earlier this afternoon Coinbase reported its fourth-quarter and full-year 2022 results. In response to the company’s raw numbers, shares of Coinbase are off around 2.2% in after-hours trading as of the time of writing. (The company initially fell much farther before recovering to positive territory; gains that it later shed ahead of its earnings call.)
In preparation for today’s data download from the American cryptocurrency exchange, TechCrunch identified a number of questions that we wanted to answer, including queries relating to the company’s revenue mix, consumer activity and ability to defend its fee take rate during the present-day crypto downturn.
3 questions for Coinbase as we count down to its Q4 earnings
Let’s see what we can learn from the new data.
Questions answered
Starting with revenue mix, in the fourth quarter of 2022 Coinbase saw its trading revenues fall and its nontrading revenues rise when compared to the third quarter of the same year. This largely answers our query regarding where Coinbase’s top line would come from in a world of more limited trading activity.
Of the company’s $604.9 million worth of net revenue in the fourth quarter, some $282.8 million came from subscription and services revenues, or just under 47%. That same figure was 36.5% in Q3 2022 and 8.6% in the year-ago period.
Put simply, Coinbase has undergone a massive revenue makeup change from trading incomes comprising the vast majority of its top line to merely half; the shift was more driven by falling trading revenues but on a year-over-year basis, Coinbase’s “subscription and services” revenue rose a respectable 32.5%. In a crypto winter, that’s nothing to sneeze at. (Coinbase benefited from a rising interest rate climate when it came to income generated from interest itself in the fourth quarter when compared to the year-ago period.)
As we noted in our first look at Coinbase’s Q4 results, the street expected the company to report 8.4 million monthly transacting users. Per the company, the figure came to 8.3 million in the fourth quarter, slightly under its full-year result of 8.8 million. How you parse that slight Q4 miss is up to you, but with trading volumes continuing to fall in the fourth quarter it’s clear that consumers did not return to the crypto market in droves in Q4, at least in the United States where Coinbase is based.
For startups, falling trading incomes contrasted with generally in-line active trader numbers indicate that while the crypto market continues to endure difficult conditions, there’s some resilience to be found, as well. The news could have been worse.
Our final question from earlier today dealt with Coinbase’s take rate. Here’s what the company had to say on the matter:
Our Q4 blended average consumer fee increased compared to Q3. The primary factor was a lower mix of advanced trading volume. In connection with multi-year lows in crypto asset volatility and the migration of the majority of users from Coinbase Pro to our advanced trading experience on our consumer application, we saw a notable decline in advanced trading volume particularly in December. Since advanced trades carry a lower fee, the result was an increase in our blended average fee.
Our institutional blended average fee declined in Q4 compared to Q3, driven by lower fees associated with our market maker program. The vast majority of our reported institutional trading volume came from our Spot Market, where market makers and high frequency traders are the core customers.
That’s a little plus and minus. In percentage terms, Coinbase’s $145 billion worth of trading volume in the fourth quarter, and its resulting $322.1 million in transaction revenues gave the company an effective take rate of 0.22% in Q4, a modest decrease from the 0.23% it recorded in Q3 2022, and more sharply below the 0.42% it managed in Q4 2021, per TechCrunch’s calculations.
That take rate dipped at Coinbase is not a massive surprise as we watch other entities in the crypto world compete on fees to entice users; there has been a generally downward trajectory to Coinbase’s take rate in the last few years, though the pace of that decline slowed sharply in the fourth quarter.
To fully put Coinbase’s results into context, let’s close with a look at the regulatory climate that appears to be increasingly hostile to certain elements of the crypto market. Especially in the United States.
The regulatory climate
Coinbase isn’t the only exchange facing a rocky quarter, as the overall ecosystem tries to rebuild and move on from a tumultuous 2022 filled with a number of industry-changing events.
Broadly, crypto trading volumes fell at the end of last year due to a volatile market and a number of exchanges filing for Chapter 11 bankruptcy — including one of the (once-largest) exchanges, FTX. Even more, the U.S. Securities and Exchange Commission (SEC) has also been circulating around the crypto space as it homes in on staking businesses like Kraken’s — which got hit with a $30 million charge from the agency earlier this month.
The charge came less than a day after Coinbase CEO Brian Armstrong tweeted that he has heard rumors that the SEC would like to get rid of crypto staking for U.S.-based customers.
While the Kraken settlement inhibits its U.S. centralized staking operations, it doesn’t fully answer the question of whether the SEC will block all crypto staking going forward. It’s also worth noting that Coinbase also has its own staking services (that are currently untouched by the SEC).
In separate news, in the beginning of 2023, New York financial regulators found that Coinbase violated anti-money laundering laws by failing to conduct adequate background checks. Coinbase agreed to pay a $50 million fine to the New York State Department of Financial Services and is also required to spend $50 million on improving its compliance program.
In the wake of a number of U.S. crackdowns, the question of how crypto exchanges like Coinbase will continue to operate in America will be a focal point. Regulation — especially in crypto — will carry weight throughout 2023 as agencies and prosecutors alike continue to close in on this space. Whether Coinbase will handle any of these regulatory moves in a way that is beneficial to the business, though, is yet to be seen.
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