When Coinbase releases its second-quarter earnings on Thursday, it may signify a significant shift in America’s leading crypto exchange: transaction fees could be dethroned as its main source of income, supplanted by its association with USDC stablecoin issuer Circle.
At Coinbase’s Nasdaq debut in April 2021, its business was largely reliant on transaction fees generated by traders using its exchange. In the first quarter of 2021, Coinbase earned a staggering $1.5 billion from transactions, according to a filing with the Securities and Exchange Commission (SEC). This represented 86% of its total $1.8 billion revenue.
However, as digital asset prices have dropped, so have Coinbase’s transaction revenues, falling to $375 million in the first quarter of 2021 and contributing only 46% of its total $773 million revenue. With traders hibernating on its platform during crypto winter, Coinbase has sought to generate revenue through subscriptions and services, such as staking.
In the first quarter, revenue from subscriptions and services totaled $362 million, slightly less than transaction revenue at $375 million. Out of $362 million, $241 million was from interest income, and only $74 million came from blockchain rewards.
This increased interest income can be attributed to Coinbase’s relationship with Circle and Centre, the consortium that manages USD Coin, according to Needham & Company analyst John Todaro. When USD Coin launched in 2018, Coinbase, a founding member of the consortium, established a revenue-sharing agreement with Circle on reserves backing the token.
Stablecoins are tokens pegged to the value of a sovereign currency such as the US dollar, and are often backed by cash and government notes, such as Treasury Bills. As the Federal Reserve attempts to combat inflation by raising interest rates, the yields on these notes have also risen.
Todaro noted that Coinbase had realized “Hey, there’s real interest income to be earned here” when rates began to increase. Despite the Fed’s hikes, however, the decline of USDC’s market cap has probably offset the gains, he said.
Even if interest earnings from USDC decrease, subscriptions and services will likely take the lead, Todaro said. According to Needham & Company’s estimates, Coinbase’s revenue from subscriptions and services in the next quarter will be $320 million – significantly greater than the $242 million expected from transactions.
Although this shift toward subscriptions and services has been gradual, Todaro said it is far from a permanent move. He suggested it is a result of the current economic environment and said transaction fees could be dominant again when the Fed eventually cuts rates.
Ryan Selkis, co-founder of the crypto market intelligence firm Messari, also sees this as Coinbase’s moment for subscriptions and services, saying “This is likely the quarter that Coinbase becomes a bank vs. exchange.” In an interview with Decrypt, Selkis said that subscriptions and services have given Coinbase’s business stability, and the Fed’s hike is good news – although the revenue-sharing agreement’s structure remains unknown.
Selkis echoed Todaro’s stance, saying the resurgence of transaction revenue for Coinbase is entirely possible in the future. He stated that if there is a new wave of enthusiasm and retail appetite, and Coinbase becomes the go-to platform for onboarding new consumers and institutions, it will probably be driven by transaction revenue.
