Coinbase Q3 Financial Report Interpretation What Should be Coinbase’s Next Story

Unpacking Coinbase's Q3 Financial Report Interpreting the Data and Predicting the Next Chapter

Author: Ram Ahluwalia, Lumida CEO; Translation: LianGuai, xiaozou

Coinbase’s third-quarter financial report was recently released. Coinbase’s stock price has increased by 148% since the beginning of the year, but it dropped by approximately 4%+ after the release of the report.

I have been keeping an eye on Coinbase for some time now. The third quarter was not a great quarter for them. But I will explain in detail how Coinbase can unlock value and become the next Square, leading us into a bullish future.

Coinbase’s total revenue decline

The cryptocurrency market as a whole experienced a downward trend in the third quarter (July-September), which partially explains this result. Everything is in compliance with GAAP (Generally Accepted Accounting Principles), but mainly by reducing costs. We need to see Coinbase achieve strong revenue growth to maintain their P/E ratio.

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Base has 1 million transaction wallets

Base tells the best growth story. The most direct opportunity for Base is in payments. By combining Coinbase’s wallet assets with P2P and merchant payments, Coinbase could become the next Square or LianGuaiyLianGuail. However, Coinbase needs to address the “cold start” problem.

Imagine a protocol that enables international remittances using USDC and KYC API… such a protocol has the potential to overcome regulatory barriers.

Below is Coinbase’s segmented market income statement

If Coinbase had a bank, they would make more money by rehypothecating. Please note that Coinbase’s main drivers of revenue are stablecoins and interest income. Trading revenue is declining. Coinbase is banking on ETFs to increase their custody fee income.

About ETFs

About ETFs: It’s a double-edged sword. I admit that Coinbase will dominate the majority of the ETF business. But the profit margin is low. Custody fees amount to less than $20 million – which is less than 10% of total revenue. Additionally, ETFs decrease the likelihood of users buying Bitcoin on Coinbase because Coinbase charges transaction fees.

The bet with ETFs is that it can “expand the market.” I believe this is true… it benefits protocols, venture capital, and Coinbase’s custody. But don’t most regular users prefer the convenience brought by ETF packaging to hold Bitcoin? They get a consolidated report, cross-margin, and liquidity.

Coinbase and its executives need to lobby Congress to amend the Bank Holding Company Act so that tech companies can own/operate banks. This should be a top priority. Other tech companies like Amazon, Google, LianGuaiyLianGuail, and Apple will likely follow suit.

Significant Decrease in Coinbase Trading Volume

It has decreased by 71% compared to the previous period. Altcoins are the main source of trading revenue. Most altcoins cannot be accessed through ETFs. The recent SEC (U.S. Securities and Exchange Commission) case has provided some help to Coinbase in this regard. However, altcoins still need to provide greater utility.

Coinbase’s Products and Growth Strategy

It is evident that Coinbase is building a Web 2.5 bank. There doesn’t seem to be any mention of tokenization, only a reference to Web3.

Coinbase’s growth strategy includes:

International expansion: Singapore, Canada, Brazil

Product expansion: U.S. derivatives

As for me, I would take a different approach. Coinbase should prioritize “obtaining a banking license,” tokenization, and P2P payments.

Regulatory Environment

Coinbase’s international regulatory environment is improving. In a friendly environment, it is easier to leverage their technological stack, which is the driving force behind growth.

Other

Coinbase’s future development does not focus on trading revenue. This can be inferred from news reports and Coinbase’s continued emphasis on low costs and GAAP profitability. Given the decline in trading revenue, I expect Coinbase to further downsize.

Coinbase has repurchased $150 million in high-yield bonds. This will create a one-time non-cash income improvement and generate free cash flow. These bonds have an issuance interest rate of 3.625%. This increases Coinbase’s Weighted Average Cost of Capital (WACC) and reduces cash by approximately $150 million. In this form, I would hoard cash.

Conclusion

Let’s be frank, the third quarter was a tough one. Everyone in the crypto space should thank Coinbase for upholding the rule of law. I believe Coinbase’s best story is about Base and payments. Coinbase should consider focusing on banking operations and tokenization…

All in all, Coinbase has various “future bets.” The regulatory environment is leaning in Coinbase’s favor. But unfortunately, revenue and profits have been declining for three consecutive quarters. Coinbase needs to show the public strong growth data, and the way to achieve this is through banking operations.

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