Coinbase Q2 Deep Dive: What it Means For Crypto & COIN!

Last week one of the most recognizable Companies in crypto released its q2 Results and it wasn’t pretty in fact it Was kind of hard to watch despite how Bad the crypto markets have been over The past few months the scale of the Losses we’ve witnessed is perhaps best Reflected by the impact on coinbase’s Earnings so in my video today i’m going To break down coinbase’s third quarter Report and explain exactly what it means For the industry could the worst be over Or is there more pain to come well That’s exactly what we’ll find out today So don’t go anywhere [Music] As you can no doubt tell by the action Of coinbase’s share price on the day the Markets did not like the company’s Results and that’s simply because the Numbers came in lower than expected and Those expectations were already set Quite low given the market turmoil we Saw in q2 For example the market was expecting a Per share loss of 2.65 and instead we Got a loss of 4.98 Top line coinbase reported a 1.1 billion Net loss which is in stark contrast to The 1.59 billion in net income that we Saw in the last quarter The only number which appeared to beat Analyst estimates was the number of Monthly transacting users which was 9

Million estimates were 8.7 million But no matter which way you slice them These results just weren’t good They also capped off a torrid past few Months for coinbase as the exchange was Hit by a number of pr disasters and Legal challenges Just to give you an idea here are just a Few of the setbacks the good folks at Coinbase have faced recently They said that they would be freezing Hiring but this wouldn’t affect job Offers Then they said that actually they were Rescinding job offers They decided that wasn’t enough so they Decided to cut 18 of their workforce They released an nft platform that no One used the sec said that coinbase had Potentially listed seven securities the Company’s share price hit rock bottom And the sec revealed that it is probing Coinbase earn Yet despite all of these woes and more Besides i wouldn’t completely write Coinbase off that’s because despite the Negative press and dismal results there Are still some pockets of optimism in Its report so without further ado let’s Jump into it shall we The first chapter of the report is Titled quote crypto is cyclical the Authors here are trying to get across The most important point and that is

That these cycles are not new and the Prices have fallen by larger percentages From peak to trough in previous cycles For example in previous cycles we saw Drops of 94 85 and 84 The current downturn of 74 peaks to Trough is nowhere near as bad Moreover prices are up quite a bit from Their june lows with the likes of eth up By a not too shabby 80 Over here they also encourage the reader To take a step back and appreciate where Coinbase is now compared to where it was In q2 of 2020 as the mantra goes when in Doubt zoom out So Here are some select high level stats Monthly trading users grew by six times Quarterly trading volume grew by eight Times Assets on platform grew by four times Institutional clients have grown by two Times and coinbase has increased its Asset support by seven times Although that last one is perhaps less Something to be proud of and more a Testament to coinbase listing nearly Anything with a market pulse It’s also part of the reason why it’s in Hot water with the sec But that’s something we’ll get into Later Now something else that coinbase wants To get across here is the fact that it

Has tried to diversify away from a mere Trading fee based model to more Subscription-based services That could be things like custody fees Or staking services etc The authors also highlight that coinbase Has been incredibly involved in building Out high quality products and services And quote we have conviction that if we Continue to focus on building the right Products and services we will emerge Stronger than before Back to reality though and that is Presented in this next chapter over here Quote down markets create financial Headwinds Firstly let’s start with those monthly Transacting users or mtus yes it is true That they were slightly up on the Quarter but the key here is exactly what These users were doing In this case most of those q2 mtus were Interacting with non-investment products For example coinbase introduced staking For cardano and solana in q3 Now of course staking services generate Nowhere near the revenue that active Traders do and that would explain the Fall in coinbase’s takings That aside though the authors point out That a large proportion 77 percent of Those holding bitcoin right now are Long-term modelers and they are seeing This at coinbase where more users are

Holding their positions It’s similar to the levels of hodling That we saw back in 2018 2019 And something else that they note is the Increase in institutional clients which Is good to see I will add that more recently we heard The news of that coinbase and blackrock Partnership with its aladdin integration A great on-ramp for institutions into The crypto space Feel free to watch my video on it for More of an overview of what aladdin is Now on to the next section over here and This concerns the fall in trading volume Yep that was down by 30 From the first quarter unsurprisingly Retail trading volume fell more than Institutional although the latter was Still much lower in general Something i found interesting here is Coinbase’s disclosure that a larger Amount of trading volume in q2 took Place on offshore exchanges it said that This was the result of these exchanges Offering other products like derivatives That the institutions were more Interested in this perhaps makes sense When you look at the volumes of coinbase Compared to some of its biggest Competitors However coinbase said that the loss of These traders was not the end of the World as although they did high volumes

They did not generate that much in the Way of transaction revenue The report also states that while Trading revenue declines hurt coinbase’s Bottom line it’s more focused on Onboarding users which is fair enough When it comes to assets on the coinbase Platform they have also declined Considerably this is obviously as a Result of the fall in crypto prices and Coinbase says that it wasn’t because of Withdrawals More specifically the report states that It was down to institutions de-risking And selling their crypto for fiat Now here are the transaction revenues That coinbase generated as you can see It makes most of its money from the Retail traders and that makes sense Because its fees are a rip-off sorry not Sorry It’s pretty interesting to see though That it managed to keep its staking Revenue almost flat which can only mean That it’s achieving its goal of Diversifying into more stable streams of Income moreover the fact that staking Income has held pretty steady shows that It is less volatile than transaction Revenue The authors also noted that coinbase Earns revenue was down substantially to Two million dollars which isn’t all that Surprising given that the sec is after

It for this Next chapter though and this is where They detail how coinbase is going to Adjust to market conditions The authors start by stating the obvious And that’s that coinbase is quote Rigorously managing our expense levels Here are some of the expense reduction Moves that the company has taken Cut 18 of its workforce as i mentioned Earlier Scaled back sales and marketing so no More multi-million dollar super bowl ads Optimizing infrastructure and who knows What that means i just hope that it Doesn’t potentially lead to more outages And finally the report states that Coinbase is investing in teams in quote Lower-cost regions who said outsourcing Didn’t impact high earners Anyways over here the report has a Breakdown of the expenses for the Quarter nothing stands out here apart From a pretty large non-cash impairment Charge That’s a charge that coinbase had to Make because of the crypto assets on its Balance sheet if it wasn’t for that Impairment charge the net loss would Have been 647 million dollars instead of The 1.1 billion recorded still a loss Though Over here the report talks about product Prioritization strategy and long-term

Goals these include Bringing in an additional 100 million Users to coinbase’s retail app that is Pretty ambitious especially given Current market conditions if it’s going To achieve that then it definitely has To continue expansion outside of the United states Maintaining its position as the number One custodian at coinbase prime i’m sure That the blackrock aladdin integration Will help with that Being the number one staking provider Ambitious but achievable Establishing coinbase cloud as a market Leading platform for millions of web 3 Devs which is funny because i have never Heard of coinbase cloud have you And then the final goal of allowing Billions of people to use web3 every day Now i’m on board with that so long as It’s the decentralized open and Permissionless web 3 we all want more About that in my video on web3 The authors go over most of these goals In the section on product momentum in Chapter 4. i won’t go over it all but There were a few products and Disclosures that caught my eye Firstly i had no idea of coinbase 1. it Seems to be in beta phase but Essentially it’s a subscription service That will give some users additional Benefits this includes fee-free trading

One million dollars in account Protection advanced support and access To masari research reports Now this is an interesting concept and It could help to generate some Subscription income among completely new Users I wouldn’t personally pay for these Services but that’s not to say that Others wouldn’t appreciate it Over here the report discusses the Additions to coinbase prime and its Institutional services In addition to that blackrock aladdin Integration it also launched its first Regulated derivatives offering This has been slow out of the gates but It could be a great way for coinbase to Compete with some of those offshore Exchanges through a regulated wrapper That said it’s not as though there won’t Be competition stateside both ftx us and Crypto.com have been trying to roll out These offerings by acquiring the likes Of ledger x and nadex respectively so The competition is heating up Something else mentioned in the staking Section is that in early august coinbase Started offering eth institutional Staking services This is a great move as these Institutions would like to get exposure To passive eth income through the Institutional wrapper coinbase can offer

I happen to think that this will take Off aggressively when the eth merge Completes That is not far away and if you want the Latest updates feel free to subscribe to My clips channel link in the top right Here the report talks more about Coinbase cloud basically a service that Developers can use to build web 3 dapps It’s an interesting product suite and Coinbase is definitely not without Competition Cloud giants such as aws microsoft and Google are all rolling out platforms for Blockchain development having said that Coinbase does have the integrations and Payment rails set up that could help Ease the process for devs It’ll be interesting to see whether it’s Able to lure skeptical web3 builders to Use its platform And speaking of skeptical users the Authors also talk about coinbase’s nft Offering as i mentioned when coinbase Rolled out its nft platform a few months Ago it was tumbleweed city i don’t know How it’s going to convince users to move Over to its platform from the more Established marketplaces that being said It is giving developers tools to build Nft apps on coinbase cloud and the Coinbase wallet will support the Instagram integration although don’t Expect this to help coinbase’s bottom

Line Okay so that’s the product suite a Reasonable mix of optimistic services That could help coinbase in q3 assuming They are effectively executed Now the next chapter is also really Interesting as it relates to coinbase’s Financial position Right off the bat the authors state that The exchange’s financial position is Strong and it has ample liquidity to Fund its business through this market Environment That should have been obvious but i Think they felt it important given all The fud that’s been flying around in the Wake of the voyager and celsius Collapses At the end of q2 coinbase had 6.1 Billion in available cash and cash Equivalents you can see a high-level Breakdown of what these reserves look Like over here so it appears to have Solid reserves held in stable assets If you were to include the crypto assets Held for investments the number comes Out at 6.5 billion If you want to get a better idea of how The position looks and how it changed Over the quarter then they have Annotated the balance sheet and cash Flow statement Below that coinbase gives a bit more of An overview of its risk management

Process Transparency is key and here are some of The most important facts laid out Customer assets are backed one-to-one With deposits These are never lent out or Rehypothecated All lending on coinbase is 100 backed by Collateral All of these measures have meant that Unlike many c5 crypto firms in the space There were no restrictions on Withdrawals no counterparty insolvencies And no changes to access of credit for Clients That is great to see and despite all the Fud that gets thrown coinbase’s way this Shows that it does practice solid risk Management It’s also further proof that the damage We’ve seen in the crypto space over the Past few months is not a crypto risk It’s a credit risk Lending firms market makers and hedge Funds had poor risk management controls And their contagions spread through the Ecosystem more about that in my video on 3ac The report mentions that coinbase had no Exposure to the affected firms celsius Voyager or 3ac but they did leave a Cheeky footnote here That’s because coinbase ventures had Invested in terraform labs last year as

Part of a 25 million raise although they Did call it quote non-material Now one final section in this chapter Focuses on coinbase’s regulatory Strength the authors go over all the Licenses that coinbase holds from Individual states and countries no doubt An asset when it comes to expanding in a Compliant way They also go over some of the Initiatives that coinbase has been Involved in to clear up regulations and Provide clarity with both the sec and The mica bill in europe of course the Worst news was left for last and that Was the disclosure that the sec had sent Requests for information around Coinbase’s listing procedures it also Got similar requests in may which it did Respond to This is related to that insider trading Case which involved an x ex-coin based Employee and seven cryptocurrencies that Are listed on coinbase’s platform Interestingly nowhere in this report did Coinbase mention this insider trading Case which is weird as i would have Thought it’d be relevant but hey ho On another note this regulatory Disclosure doesn’t include the sec’s Probe of coinbase urn and that’s because That news broke after the report was Published So it’s quite clear that coinbase does

Face some legal headwinds that’s part of The reason why kathy wood dumped her Stock near all-time lows a few weeks ago But even with this there are some silver Linings Now the next chapter is perhaps one of The most interesting as it relates to The forward-looking projections of Coinbase both for q3 and the full year Starting with q3 the reports authors Expect Monthly transacting users to decline From q2 it’s also not great that they Expect these users to be more passive in Their use of coinbase This will mean that they also expect Lower transaction revenues Subscription revenue could be up in q3 As coinbase continues to expand into Subscription type services And then moving on to the full year Projections they’re expecting a 500 Million adjusted ebitda loss They expect Mtu numbers to average about seven to Nine million Lower revenue per transacting user which They estimate to be in the low 20s bear In mind that in q2 this was in the high 20s so that of course would mean softer Revenues They expect growth in subscription-based Revenue and services to continue past q3 And into the full year

The total revenue that they expect to Make from this is more than 600 million Dollars so Pretty much a very very conservative Outlook for the rest of the year perhaps They’re trying to guide expectations to The downside so they don’t miss analyst Estimates again Well that’s it as far as the report goes But now it’s time for your favorite part Of the video my thoughts on it Well if i must be honest these were Really bad results they showed exactly How much the markets had impacted on the Bottom line of businesses that depend on Trading revenue this is not just a coin Base issue of course and one can only Assume that there are a number of other Exchanges out there that have similarly Large falls in their revenue base Moreover those crypto businesses like Coinbase that keep crypto on their Balance sheets are doubly exposed to the Markets Those assets will need to be marked down And that will impact the bottom line Moreover despite the fact that coinbase Has been cutting its workforce it Doesn’t look as if its cost base has Dropped enough at least to the point of Profitability And there is tough competition in the Space with a number of us-based Exchanges looking to eat coinbase’s

Lunch Given that coinbase is limited to the Products it can offer it is losing some Clients to those offshore exchanges that Offer derivatives and other financial Instruments in high demand And last but not least coinbase faces a Number of legal challenges that could Drag it into a quagmire which drains its Time and resources so no hope right Well not so fast Firstly q2 could be a low base we’ve Already seen a resurgence in crypto Prices in the first month of q3 and this Could help drive revenues above Expectations a similar thing can be said About those crypto assets on the balance Sheet the report marks them down to 30th Of june prices By using the total crypto market cap as A proxy prices are now already 30 Percent above where they were then That means positive fair value Adjustments which i think impact the Bottom line i also think that when eth Transitions to proof of stake this will Provide an immense opportunity for Coinbase to dominate the institutional Staking game as the partnership with Blackrock makes clear coinbase prime is Still a heavy hitter in the Institutional space This will provide coinbase with that Strong subscription income it so desires

Something that could smooth coinbase Earnings in the future and make the Shares a lot more appealing And while expenses have not come down as Much as revenue it’s a sign that the Company is investing for the long term As stated at the beginning of the report Coinbase is focused years ahead and the Things it spends money on now will help Drive growth long into the future and Finally although it’s facing legal Challenges from the likes of the sec There is hope on the horizon and that’s The potential for a change of guard in Dc There are many politicians who aren’t Happy with the way the agency has been Enforcing laws So in the end coinbase is a mixed bag is Coin undervalued right now perhaps but i Wouldn’t be selling it short either And that’s it for my rundown of the Coinbase q2 report i’m keen to get some Feedback though so what are your Thoughts on coinbase is coin undervalued At the moment i’d love to know in the Comments below and while you’re down There you can also find the link to my Socials page which has all the other Places you can follow me twitter Telegram instagram and tick tock there’s Also the link to my newsletter my once Weekly overview of the crypto markets Which includes upcoming videos and a

Breakdown of my personal portfolio the Links to all of those are in my socials Page below And finally if you found this video Helpful slap a like on it subscribe and Ping that bell as well to make sure you Never miss another one time’s up for This crypto guy but i will be seeing you Guys Very soon [Music]