A decade in, Coinbase’s fortunes remain closely tied to bitcoin

Coinbase launched in 2012 to facilitate the buying and selling of bitcoin from US bank accounts. Twelve years and several new revenue streams later, its fate still remains deeply tied to the largest cryptocurrency.

This reliance deepened with the Securities and Exchange Commission’s approval of spot bitcoin ETFs. Coinbase takes in custodial fees for several of the ETFs, although some analysts warn growth of the new trading products could come at Coinbase’s expense. But with the SEC’s ongoing attempt to declare the trading of several non-bitcoin tokens on Coinbase illegal, the importance of bitcoin trading to Coinbase’s business doesn’t seem to be under any risk of decline.

Still, bitcoin trading is less important to Coinbase than it once was. In 2020 and 2021, trading fees accounted for well over 80% of the firm’s quarterly revenues.

That changed when Coinbase grew out its staking business and partnership with stablecoin issuer Circle. Transaction fees account for closer to half of Coinbase’s revenue today, and bitcoin accounted for 38% of those transaction fees in Q3. These other streams of revenue face notable risks, however.

Interest earned on its USDC reserves has become a growing chunk of Coinbase’s revenue. The 5.1% yield Coinbase offers on USDC is based on its Treasury backing. A potential decline in US interest rates could squeeze Coinbase’s stablecoin revenue, Dessislava Aubert, an analyst at crypto research firm Kaiko, said.

Blockchain rewards, including rewards earned for staking tokens to secure blockchains, accounted for 11% of Coinbase’s revenue in 2023. Staking, where users can let Coinbase stake their tokens in exchange for yield, has been a prominent part of Coinbase’s diversification strategy.

The SEC is taking aim at staking in its ongoing court battle with Coinbase. If a Coinbase motion to dismiss the SEC’s lawsuit against it fails, the firm faces the risk of a loss in court and an end to its staking services — as well as the trading of some altcoins.

But no one is questioning Coinbase’s ability to facilitate the flow of investments into and out of bitcoin.

Some analysts think Coinbase’s revenue from bitcoin trading is jeopardized by the long-awaited approval of spot bitcoin ETFs, which create competition for Coinbase’s bitcoin trading business. Coinbase is a custodian on nearly all the ETFs, but a race to the bottom on ETF fees means Coinbase would collect less for custody than it does on trading fees on its own exchange.

When reached for comment, a Coinbase spokesperson pointed to a quote from CEO Brian Armstrong on a post-ETF approval appearance on CNBC: “[Y]es, we will generate revenue as the custodian of 10 of the 13 ETFs….But our existing customers in our retail app…they don’t just want exposure to bitcoin, they want to use bitcoin for a number of things. They want to use the other crypto assets out there for commerce and staking and Web3 and decentralized identity.”

In a Jan. 25 report on Coinbase, equity research firm Oppenheimer said it expects the vast majority of retail investors to keep their bitcoin positions on Coinbase for the reasons Armstrong laid out — plus the fact that Coinbase doesn’t charge an annual fee.

The demand for custody services will also depend on the continued upward trajectory of bitcoin’s price — a trend that predates even the founding of Coinbase.

“This is one of the major determinants of their revenue headed into 2024: what [are] the prices of cryptocurrencies and bitcoin in particular?,” Leverage Shares senior analyst Violeta Todorova said.