How Does Coinbase Make Money Amidst a Trading Slowdown?

On October 29, Coinbase released its third-quarter financial report. Despite a sluggish crypto market, the company's revenue remained relatively stable. One notable change in the report is that subscription and service revenue is now approaching trading revenue.

This company, which started with crypto trading, is trying to diversify its business across market cycles. Stablecoins, subscriptions, and prediction markets are all included in the same report card. However, when breaking down the proportions, revenue, and profits, a more complex picture emerges.

Has the Revenue Structure Changed, and Is There More Money?

First, let's look at the most straightforward change. Coinbase's financial report shows that subscription and service revenue accounted for 49% of net revenue in the third quarter. This means that nearly half of every $100 in net revenue comes from services outside of trading.

Trading Revenue vs. Service Revenue

The gap between the two lines is narrowing, but the main reason is that trading revenue is declining faster. Over the past year, trading revenue has decreased by 44% year-on-year, while subscription and service revenue has also dropped by 20%. The increase in proportion is a real change, but it does not mean that service revenue has escaped the market cycle.

The sluggish trading is evident. Coinbase disclosed that the total crypto trading volume in the market decreased by 10% quarter-on-quarter, and the company's trading revenue fell by 1% quarter-on-quarter. The platform's market share of crypto trading volume has risen for the fourth consecutive quarter, reaching 10.7%. While the pie is shrinking, Coinbase has secured a larger slice.

New products are also helping to fill the gap. The company stated that the growth of prediction markets has buffered the decline in consumer crypto spot and derivatives trading volumes. The annualized revenue from prediction markets exceeds $200 million, which is an annualized figure over a period of time and not the actual revenue for the quarter, and it cannot be directly added to quarterly revenue.

This distinction affects interpretation. Revenue from prediction markets is included in trading revenue, while subscription and service revenue includes stablecoins, blockchain rewards, and interest, among other items. Observing Coinbase's diversification requires looking at both revenue outside of trading and whether new sources of revenue have emerged within trading revenue.

More USDC, Why Hasn't Revenue Increased Accordingly?

Stablecoins represent the largest portion of service revenue. Coinbase's financial report shows that stablecoin revenue in the third quarter was $307 million, accounting for more than half of subscription and service revenue.

Users holding more USDC in Coinbase products typically generate more related revenue for the company. However, this is not a straightforward linear relationship. The chart converts both metrics to a baseline of 100 from the same period last year, showing that the holdings on the platform have been rising, while stablecoin revenue remains below last year's levels.

USDC Holdings vs. Stablecoin Revenue

The reason lies in the fact that Coinbase's stablecoin revenue does not solely depend on the balances within the platform. The company's financial report divides the economic benefits related to USDC into parts such as platform product balances and external platform balances, and the scale and revenue contribution of these two parts can vary, with interest rates also affecting the results.

The report shows that external USDC-related revenue decreased compared to the previous quarter, partially offsetting the growth from the record-high average holdings on the platform and rising interest rates. In other words, having more USDC in Coinbase products does not automatically guarantee that overall stablecoin revenue will increase in tandem.

The USDC held by the platform itself also has accounting differences. The financial report's appendix separately lists the income generated from the company's own holdings and combines it with stablecoin revenue. Therefore, when analyzing, it is necessary to distinguish between the total amounts in the appendix and the stablecoin revenue in the income statement.

Did Earning $719 Million Indicate a Real Recovery in Operations?

In the third quarter, Coinbase's net profit returned to positive territory. The report shows a net profit of $719 million, compared to a loss of $360 million in the previous quarter. Looking at just this line, one might easily assume that the company's daily operations suddenly improved by a similar magnitude.

Net Profit vs. Adjusted Net Profit

One of the biggest changes in the profit statement comes from investments. Coinbase's crypto assets held for investment generated a net gain of $715 million in the third quarter, whereas this item was a loss in the previous quarter. This gain is included in net profit but does not come from fees paid by customers on the platform.

Coinbase also disclosed its adjusted net profit. This metric excludes gains and losses from investment-related crypto assets and other investments, considering the corresponding tax impacts. According to the company's standards, the adjusted net profit for the third quarter was $77.7 million. It also turned positive, but there is a significant gap compared to the net profit under generally accepted accounting principles.

This does not mean that operations have not improved. The financial report shows that the operating profit for the third quarter was $61.7 million, compared to an operating loss in the previous quarter. Total operating expenses decreased during the same period, with the company stating that technology development expenses benefited from previous cost reductions, and management expenses also declined due to reduced professional service expenditures.

Adjusted EBITDA reached $333 million, a 60% quarter-on-quarter increase. However, this metric also excludes items such as equity incentives and depreciation, and cannot be directly considered as net profit or cash flow. Only by looking at all three metrics together can one clarify the positions of investment gains, expense changes, and operational performance.

The changes in Coinbase this quarter are hidden within two revenue curves that are gradually converging, as well as between two different profit metrics.

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