Coinbase’s earnings fall short of expectations as crypto

Today after the bell, the largest U.S. cryptocurrency exchange Coinbase reported its second quarter performance. In the second quarter, Coinbase reported net revenues of $802.6 million and earnings per share of -$4.98 (diluted), predicated on net income of -$1.09 billion. The company’s adjusted EBITDA, a highly non-GAAP metric, was -$151 million in the period.

Analysts had expected the company to lose $2.65 per share off revenues of $832 million, per averages shared by Yahoo Finance. Per those estimates, Coinbase posted a top-and-bottom line miss.

Coinbase shares were off around 10.5% during regular trading hours. In the wake of its earnings announcement, Coinbase’s stock is off modestly, although it has traded somewhat chaotically in early after-hours trading.

Coinbase’s Q2 results

Coinbase’s quarter included a large gain in costs compared to the year-ago period — around $500 million — and a sharp revenue decline. In the second quarter, Coinbase’s net revenue declined from $2.033 billion to $802.6 million, a drop of around 60%. The combined gain in expense and decline in top-line income put the company deeply into the red.

Indeed, Coinbase flipped from an operating profit of $874.7 million in the second quarter of 2021 to a $1.04 billion operating loss in the second quarter of this year. Other expenses, including interest-related costs, pushed its net income under its operating income result.

What drove the higher cost basis for Coinbase? Part of the cause can be found in share-based compensation costs, which rose from $189.3 million in Q2 2021 to $391.5 million in its most recent quarter. Looking at other expense categories, R&D costs and G&A expenses also rose sharply, while sales and marketing costs eased by around $45 million compared to the year-ago period.

Coinbase remains a wealthy company, per a first look at its updated balance sheet. However, the company’s cash and equivalents are down from $7.12 billion at the end of 2021 to $5.68 billion at the end of Q2 2022. Coinbase also holds customer cash of $7.18 billion (off from $10.53 billion at the end of 2021), and, notably, $361.7 million worth of the USDC stablecoin, up sharply from just over $100 million at the end of last year.

Crypto context

In general, crypto trading activity has slowed across all exchanges, which in turn has affected Coinbase’s main revenue stream (transaction fees.) Total trading volume on Coinbase dipped from $309 billion to $217 billion in Q2 — a 30% drop from Q1 2022, partially driven by a decline in monthly transacting users (MTUs), which fell to 9 million from 9.2 million over the same timeframe.

“The current downturn came fast and furious, and we are seeing customer behavior mirror that of past down markets,” the company said in its Q2 2022 shareholder letter.

In its letter, Coinbase noted that its core retail customers are trading less. As a result, its MTU mix has trended toward activities besides trading, such as staking, the company wrote, admitting that such “non-investing” activities are less lucrative in terms of the revenue they bring in per user. The company attributed the trading slump, in part, to the high percentage of BTC and ETH users holding on to their assets rather than “selling into market volatility.”

Despite Coinbase’s conviction in these HODLers, the company wasn’t insulated from the overall decline in crypto prices in the second quarter. Assets on the platform dwindled, down nearly 63% from $256 billion last quarter to $96 billion. That decrease in assets on platform wasn’t just because of prices dropping, though — the platform also saw net outflows in Q2, largely driven by institutions “selling their crypto for fiat,” according to Coinbase’s letter.

Both retail and institutional trading revenues fell in the quarter, with Q2 seeing net transactional revenue from consumers of $616.2 million, and institutional trading revenues of $39 million. Those figures were down from $965.8 million and $47.2 million in the first quarter of this year, respectively, and also off from year-ago second quarter results of $1.83 billion and $102.4 million.

The total percentage of crypto assets on the platform evolved on a quarter-over-quarter basis, with Bitcoin rising to 44% from 42% in Q1 2022, and fiat (traditional cash) expanding to 7% from 4% in the sequentially preceding quarter. Meanwhile, Ethereum and other crypto assets fell to 20% and 29% of Coinbase platform assets, respectively.

Outside of its Q2 earnings report, the slowdown has also been reflected in Coinbase’s average daily trading volume, which in August has stayed relatively flat since July at approximately $1.8 billion despite the recovery in crypto prices over the past month, continuously updated data from Nomics shows. That’s a steep drop from the $3 billion average daily trading volume on the exchange in March this year, before “crypto winter” kicked into high gear.

The company’s financial news comes quickly after it announced several new partnerships in the third quarter, which TechCrunch viewed as potential growth levers for the business in the coming quarters. Coinbase partnered with BlackRock, the world’s largest asset manager, which oversees $10 trillion in assets, to provide institutional clients with access to cryptocurrency. It also is being integrated in Meta’s new plans to integrate crypto wallets.

The crypto exchange has been making headlines for a number of reasons, including the partnerships mentioned above, but also because of its hefty and somewhat controversial layoffs and a hiring freeze that occurred in June. The company recanted offers and laid off about 18% of staff to “stay healthy during this economic downturn.”