Coinbase’s Q1 2021 results, released after the close of the market on Thursday, reflected the strength of the crypto price cycle that started in Q4 2020, as .crypto market cap soared to nearly $2 trillion at the end of Q1 2021 vs. $765 billion at the end of 2020.
Net revenue increased 223% in the quarter, to $1.45 billion, as the number of retail users trading on the platform (a.k.a. Monthly Transacting Users or “MTUs”) grew to 6.1 million, more than doubling in the quarter.
While the results were impressive by any measure, they fell short of Wall Street’s lofty expectations, and Coinbase shares fell by 2.5% on Friday, in stark contrast to the 2.3% gain in the NASDAQ.
After sifting through the earnings release and the Q&A transcripts (one with analysts and one that was open to the public), these are the eight most interested things I learned:
1. Coinbase Charges Retail Investors 47.6X More Per dollar Of Trading Volume Than It Charges Institutional Investors
Trading volume in Q1 reached $335 billion, of which $215 billion, or 65%, was institutional. But institutions only accounted for 5.5% of revenue. This means. on average, retail investors paid 47.6X more in fees per dollar of transacted volume.
2. Margins Were Compressed In 1st The Quarter For Both Retail & Institutional Investors
Even though there were no changes to Coinbase’s retail fee rates in Q1, retail margins were lower in Q1’21 compared to full-year 2020 levels (120 basis points vs. 140 basis points) due to a higher percentage of retail trading volumes among Coinbase Pro users, who pay lower fees.
Similarly, institutional transaction fee rates, were lower in Q1 as a result of higher volume transactions that generate lower fees, according to their tiered fee structure.
3. Coinbase Is Not Capturing The Opportunity In Alts
Coinbase trading volume increased 277% in Q1 vs. Q4, driven by a 465% increase in Ethereum volume and a 286% increase in Bitcoin. But all the other coins on Coinbase increased their volume by only 212%. That’s while all other coins increased their market share of total crypto market cap to 30% from 17%. So there’s a disconnection between the growth of alt market cap and it’s percentage of trading volume on Coinbase.
4. Coinbase’s Business Is So Tied To The Fluctuations In the Price & Volatility Of Crypto, That It Needs To Provide Multiple Outlooks
Even. though Coinbase indicated it was raising its marketing spend from 5% of revenue in 2020 to 12%-15% of revenue in 2021, it was uncertain that MTUs would increase in 2021. Among the three scenarios outlined in the outlook section of their earnings release, the growth outlook for MTUs for the rest of the year, from the current 6.1 million, ranged from an increase of almost 50% to a decrease of 10%:
5. Coinbase’s Revenue Outside Of Trading Remains Modest
On the call, Coinbase highlighted the fact that 25% of MTUs engaged with at least one non-investing product. But even after growing 172% in Q1 vs. Q4, other revenue (i.e. non trading related revenue) decreased to just 3.5% of total revenue.
On the conference call, Coinbase was bullish on the outlook for staking “..as more and more users take advantage of the opportunity to earn a reward on the Ethereum that they hold and they convert from ETH1 to ETH2 over time”.
While other revenue is a focus, Coinbase stated that their biggest focus right now is to keep up with demand. It’s hard to fault them for that.
6. Even Though Q1 2021 net income was $771.5 million, Coinbase Is Planning To Be Breakeven For “…The Time Being”
Coinbase reiterated that their “… focus is on investing for long-term growth”, recognizing the volatility of their business. As they shared in their prospectus for their direct listing, they’re seeking to operate the company at break even in terms of profitability, smoothed out over time, for the time being.
7. Coinbase Stated That They’re Not Going To Change Their Business Strategy Because They’re Public
In the press release they made the points that they’re not going to “Succumb to the pressure of quarterly earnings targets..”, or “Underinvest in the business..” or “Become more risk averse simply because we are a public company.”
Coinbase stated that they will “Continue to make bold bets that might not appear obvious to the world”, “Stay hungry and foolish.. and won’t rest on our laurels..”. After all, as the stated, they’re “…here to build a generational company”.
8. It’s Like The Early Days Of The Internet
Brian laid out the three stages of crypto. The first stage is crypto as an investment. Stage two is crypto in financial services, with things like decentralized exchanges, DeFi, decentralized borrowing and lending, and decentralized insurance. The third stage is around crypto as an app platform.
Brian sees a world where people use crypto as the next version of the internet, where apps are built natively on blockchains. Early signs of the emergence of third stage apps include those trying to solve for identity management, creating games, and artwork with NFT’s.
Brian also sees new types of autonomous organizations. He thinks more major central banks beyond China will create digital currencies. Brian likened this moment in crypto to the very early days of the internet, with tons of innovation on the horizon.
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This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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