Alternative sources of income may be a key driver for exchanges as Coinbase sees trading volumes drop but other non-trading areas rise.
Coinbase reported its fourth-quarter and full-year 2022 results. In response to the company's raw numbers, Coinbase shares are down around 2,2% in trading. The company initially fell much lower before recovering into positive territory; earnings that you then lost before your earnings report.
In preparation for today's data download from the US cryptocurrency exchange, a number of questions are being identified that require answers, including queries related to the company's revenue mix, consumer activity and the ability to defend its collection rate. of fees during the current crypto recession. .
Questions answered
Starting with the revenue mix, in the fourth quarter of 2022 the Coinbase sawtooth of its brokerage revenues fall and its non-brokerage revenues increase compared to the third quarter of the same year. This largely answers the question of where Coinbase's top line would come from in a world of more limited trading activity.
Of the company's $604,9 million in net income in the fourth quarter, some $282,8 million came from subscriptions and services revenue, or just under 47%. That same figure was 36,5% in the third quarter of 2022 and 8,6% in the same period of the previous year.
Simply put, Coinbase has undergone a massive change in revenue composition from trading revenue comprising the vast majority of its top line to just half; The turnaround was more driven by falling trading revenue, but year-over-year, 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 in terms of self-generated interest income in the fourth quarter compared to the prior year period.
As we noted in our first look at Coinbase's fourth quarter results, the market expected the company to report 8,4 million users making monthly transactions. According to the company, the figure came in at 8,3 million in the fourth quarter, slightly below its full-year result of 8,8 million. It's up to you how you look at that slight QXNUMX loss, but with trading volumes continuing to drop in QXNUMX, it's clear that consumers didn't return to the crypto market en masse in QXNUMX, at least in the States. United States, where Coinbase is headquartered.
For startups, the drop in trading revenue in contrast to the numbers of generally active online traders indicate that while the crypto market continues to endure difficult conditions, some resistance may also be encountered. The news could have been worse.
The final question is about the Coinbase acceptance rate. This is what the company had to say about it:
Our Fourth Quarter Combined Average Consumer Rate Increased compared to the third quarter. The main factor was a lower mix of advanced trading volume. Related to multi-year lows in crypto asset volatility and the migration of most Coinbase Pro users to our advanced trading experience on our consumer app, we are seeing a notable decline in advanced trading volume, particularly in December. Since advanced operations carry a lower fee, the result was an increase in our combined average fee.«
«Our combined average fee in the institutional market decreased in the fourth quarter compared to the third quarter, 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 primary clients.”
That's a little plus and minus. In percentage terms, Coinbase's trading volume of $145.000 billion in the fourth quarter and the resulting $322,1 million in transaction revenue gave the company an effective acceptance rate of 0,22% in the fourth quarter, a modest decline from the 0,23% it posted in the third quarter of 2022, and more markedly below the 0,42% it achieved in the fourth quarter of 2021.
That the take rate declines at Coinbase is not a huge surprise, as we see other entities in the crypto world compete with fees to attract users; There has been a generally downward trajectory in Coinbase's acceptance rate in recent years, although the pace of that decline slowed sharply in the fourth quarter.
To put Coinbase's results fully 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 is not the only exchange facing a difficult quarter, as the broader ecosystem tries to rebuild itself and move on from a tumultuous 2022 filled with a series of industry-changing events.
Broadly speaking, crypto trading volumes fell late last year due to a volatile market and a number of exchanges filing for bankruptcy, including one of the exchanges (once the largest), the well-known FTX. Even more, the United States Securities and Exchange Commission (SEC) has also been making the rounds in the crypto space, as it focuses on staking businesses like Kraken, which received a charge of $ 30 million from the agency earlier this month.
The charge came less than a day after Coinbase CEO Brian Armstrong will tweet that he had heard rumors that the SEC would like to get rid of cryptocurrencies for US-based clients.
While the Kraken deal inhibits its centralized staking operations in the country, it does not fully answer the question of whether the SEC will block all crypto betting going forward. It's also worth noting that Coinbase also has its own staking services that are currently unaffected by the SEC.
In other news, in early 2023, New York financial regulators discovered that Coinbase violated anti-money laundering laws by failing to perform proper background checks. Coinbase has agreed to pay a $50 million penalty to the New York State Department of Financial Services and must also spend $50 million to improve its compliance program.
In the wake of a series of crackdowns in the United States, the question of how cryptocurrency exchanges like Coinbase will continue to operate will be a key point. Regulation, especially in crypto, will carry weight throughout 2023 as agencies and prosecutors continue to move closer to this space. However, it remains to be seen whether Coinbase will handle any of these regulatory moves in a way that is beneficial to the business.
