Coinbase Cuts Q3 Losses in Half, Sees Crypto Headwinds Continuing Into 2023

Crypto exchange Coinbase (COIN) cut its third-quarter losses by 50% to $545 million from $1.1 billion in the second quarter, the company reported Thursday, as the company reined in costs and cut workers, and also increased its interest income.

However, its transaction revenue continued to be significantly impacted by macroeconomic and crypto market headwinds, which it expects to continue into 2023, as well as trading volume moving offshore, the company said in its shareholder letter.

Transaction revenue was $366 million, down 44% from Q2, driven by lower trading volume. Among the factors Coinbase cited for this decline was that “trading volume has been shifting away from the U.S., where our business is concentrated.” It noted that this shift is partly due to the “perception of uncertainty” that some digital asset issuers may have about the U.S. regulatory framework for cryptocurrencies.

Meanwhile, subscription and services revenue increased 43% sequentially to $211 million, driven by higher interest income. Rising interest income had been seen by some analysts as a potential bright spot for Coinbase given rising short-term rates. Total operating expenses were $1.1 billion, down 38% versus Q2.

Overall net revenue of $576 million was shy of the FactSet analyst consensus estimate of $646 million and down from $803 million in Q2. The company ended Q3 with $5.6 billion in cash, in addition to $483 million in crypto assets, which the company believes “puts us in a strong position to manage through the crypto winter.”

For 2022, Coinbase said it remains "cautiously optimistic" that it will operate within the $500 million adjusted EBITDA loss guardrail that it previously shared, based on the assumption that crypto prices do not deteriorate significantly and that customer behaviors don't change. "For 2023, we’re preparing with a conservative bias and assuming that the current macroeconomic headwinds will persist and possibly intensify," Coinbase concluded.

Coinbase shares rose about 3.8% to $57.90 in after-hours trading on Thursday after falling 8% during the day's trading. Coinbase shares are down more than 75% this year, compared to bitcoin’s roughly 56% decline. Coinbase’s stock has plummeted this year with the crypto and equity market rout leading to a slowdown in retail trading. In response, the crypto exchange slashed around 1,100 jobs in June and focused on controlling costs.

On Coinbase's earnings conference call, management expressed optimism in their platform, but was cautious about the macro environment. Still, CEO Brian Armstrong struck an optimistic note.

"In the down markets, you get to focus on building," Armstrong said, adding that innovation is still occurring and that many institutions continue to dabble in the sector and prep for when macroeconomic conditions improve.

Armstrong also said he expects USDC to be the de-facto CBDC in the U.S. The company said it benefitted from being engaged in the USDC ecosytem during the third quarter, according to its statement. Coinbase entered into agreements with the issuer of USDC, pursuant to which Coinbase shares any revenue generated from USDC reserves pro rata based on the amount of USDC distributed by each respective party along with the amount of USDC held on each respective party’s platform, the statement noted.

During the quarter, Coinbase announced a partnership with BlackRock to allow customers of the giant asset manager to trade crypto through the exchange, and also partnered with Google to accept crypto payments for cloud services.

UPDATE (Nov. 3, 20:46 UTC): Updated COIN's share price movement.

UPDATE (Nov. 3, 21:31 UTC): Updated with background and additional information throughout.

UPDATE (Nov. 3, 22:48 UTC): Updates to include commentary from conference call, USDC engagement, and share price.