Coinbase spent 5 years building a life raft away from Bitcoin and still managed to lose $359M

Coinbase told investors on Thursday that 88% of its second-quarter net revenue came from something other than Bitcoin spot trading. The same release reported a $359.5 million net loss under US accounting rules, the company’s third consecutive losing quarter.

Both numbers describe the same three months. Taken together, they get closer to the truth about Coinbase than either one does alone.

The arrangement the company carried into its 2021 listing was easy to understand. Retail customers traded more when Bitcoin went up, and they paid a fee on every transaction. So when prices flattened, the revenue flattened with them.

Almost everything built since has aimed at severing that connection. Derivatives, stablecoin distribution, custody, staking, lending, prediction markets, and an in-house blockchain were all supposed to produce income in phases of the market when nobody wants to trade.

The second quarter of this year really put all that effort to the test. Industry-wide spot volume fell 25% quarter over quarter, crypto prices dropped 11%, and volatility compressed to multi-year lows. Bitcoin lost roughly 14% across April, May, and June, while Ethereum went down about 25%.

Coinbase held up better than the market around it. Total revenue declined 14% to $1.22 billion, and the company took a record 10.3% share of global crypto trading volume, up from 9.1% in the first quarter.

Revenue, customer assets, active users and profitability all moved in the same direction, and shares fell about 6% in after-hours trading from a $163.55 close.

What the 88% share actually measures

Bitcoin spot trading now contributes roughly an eighth of Coinbase’s net revenue, against 55% in the second quarter of 2020. Subscription and services revenue has grown from $6 million in that quarter to $555 million in this one, according to the company’s earnings release.

What the number actually measures is much narrower than what it suggests. Revenue outside Bitcoin spot trading still includes fees on every other asset, on derivatives, and on prediction market contracts, all of which respond to the conditions that move Bitcoin trades.

The dollar amounts underneath the percentage make the same case. Transaction revenue exceeded what subscriptions and services brought in, and consumer trading alone accounted for more than a third of everything Coinbase earned.

Consumer spot volume fell 24% while the revenue attached to it declined 20%, which is the outperformance the company points to. Institutional transaction revenue dropped 26% to $100 million, and other transaction revenue slipped 11% to $47 million on weaker instant transfers and lower Base revenue.

Derivatives supply the strongest evidence that something structural has changed. Volume held roughly flat while the broader derivatives market fell about 12%, pushing Coinbase’s derivatives share to a record for the third straight quarter, with trailing-twelve-month volume above $4.2 trillion.

The $2.9 billion Deribit acquisition brought an institutional options franchise, and a CFTC no-action letter in May opened a regulated route for US customers into the global perpetual futures pool that dominates offshore derivatives trading. Those contracts generate activity in both directions of the market, and they trade around the clock.

Prediction markets grew faster than anything else on the platform. Contracts and revenue climbed 106% quarter over quarter, and the business crossed a $100 million annualized run rate, helped along by the NBA playoffs and the World Cup.

Coinbase excludes that volume from its headline trading metric, so the growth appears inside consumer transaction revenue without inflating the market share figure.

Both businesses significantly reduce the company’s dependence on price direction, and both preserve its dependence on customers wanting to trade at all.

Every replacement business Coinbase builds comes with its own exposure

Average USDC held in Coinbase products reached an all-time high of $20 billion, up 44% year over year. USDC held in Coinbase products now accounts for more than 30% of the stablecoin’s circulating supply.

Nonetheless, stablecoin revenue still fell to $292 million from $305 million in the first quarter, because lower interest rates and weaker off-platform balances outweighed the record pile held on the platform.

Coinbase keeps all the reserve interest on USDC held inside its own products and splits the rest with Circle, which lets the company control more dollars while earning less on each one.

CryptoSlate covered the pressure that arrangement puts on Circle, and Brian Armstrong closed the question on the call. The auto-renewal conditions have been met; the partnership renews on the same terms in August, and the largest overhang on this revenue line has come off.

The rest of the subscription line follows similar logic. Blockchain rewards contributed $83 million, held back by falling prices and lower protocol reward rates even as the number of native units staked continued to grow.

Interest and finance fee income of $66 million stayed roughly flat, with record average DeFi borrow and lend balances of $1.5 billion offset by rates. CFO Alesia Haas attributed the segment’s shortfall against guidance to USDC deals that landed later in the quarter than expected and to price declines that ate into staking income.

Custody carries the same sensitivity in a different form. Assets on the platform finished the quarter at $245.9 billion, down from $425 billion a year earlier, with most of the decline attributed to Bitcoin ETF movements.

Coinbase can hold the same number of coins and watch the dollar figure that anchors its custody economics fall anyway.

Base offers the most instructive divergence. Stablecoin transaction volume on the chain grew sevenfold year over year, and the company put trailing-twelve-month transfer volume at $32 trillion, yet Base revenue declined and pulled other transaction revenue down with it.

Cheaper transactions and activity inside applications that pay Coinbase little produce exactly that pattern. Adoption and monetization run on separate clocks.

Cost discipline carried a good share of the resilience. Coinbase cut 14% of its workforce in May, ending June with 4,321 employees against 4,988 three months earlier, took a $52.4 million restructuring charge and brought adjusted expenses to about $1 billion, down 9%. Full-year adjusted expense guidance came down to a range of $4.2 billion to $4.45 billion.

The loss itself deserves a closer look than the headline allows. Inside the $359.5 million GAAP figure are $209.5 million of losses on crypto held for investment and $238.3 million of stock-based compensation, which is why Haas pointed to a $105 million adjusted net loss as the better measure of the operating quarter.

The balance sheet absorbed all of it. Coinbase closed with $8.6 billion in cash and roughly $10 billion in total available resources after repaying a $1.3 billion convertible note on June 1, leaving about $2 billion of buyback authorization untouched.

The company has finished the first half of its escape. Bitcoin spot fees no longer decide the quarter, and the company owns real positions in derivatives, stablecoins, custody, lending, prediction markets, and onchain infrastructure.

The second half is still in progress, because every one of those businesses earns more when balances grow, prices recover, volatility returns and customers transact more often. Those are the conditions the old trading business ran on.

Coinbase reported roughly $130 million of transaction revenue through July 26 and guided subscription and services revenue to between $500 million and $580 million, a midpoint a little below where June ended.

The company has built several ways to earn from the crypto cycle where it once had one, and the next few quarters will settle whether several cyclical businesses can add up to a durable one.

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