Coinbase Fails to Rally Despite Improving Numbers

Shares of Coinbase (NASDAQ:COIN) are trading modestly lower on Wednesday despite the cryptocurrency exchange reporting top and bottom line numbers that beat analysts’ expectations for the fourth quarter.

Coinbase reported a loss per share of $2.46 for the fourth quarter, narrower than the estimated loss per share of $2.55, according to Refinitiv. Revenue came in at $629 million in the three-month period, beating the consensus estimates of $590 million. Revenue was down 75% year-over-year (YoY) as the cryptocurrency market continues to pressure market prices.

Falling User Base/h2

Coinbase posted a non-adjusted net loss of $557 million in Q4, marking a sharp U-turn from a year earlier when it reported a net income of $840 million amid peak crypto adoption. However, the most worrying part of the report is Coinbase’s shrinking user base.

The San Francisco-based company reported 8.3 million monthly transacting users (MTUs) in the fourth quarter, down from 8.5 million in the prior quarter. This compares to analysts’ estimates of 8.22 million.

Coinbase said trading volume dropped 8% quarter-over-quarter to $145 billion, while transaction revenue declined by 12% to $322 million during the same period, compared to a consensus projection of $327 million. For the ongoing quarter, Coinbase said it expects subscription and services revenue in the range of $300 million to $325 million, as well as restructuring expenses of around $150 million.

Meanwhile, Coinbase has been ramping up efforts to find new revenue streams and stop relying solely on trading fees. While the exchange has a number of fees such as a 0.50% spread and various purchase fees that climb as high as 3.99% for purchases via debit card, subscription-based services continue to gain popularity. The company generated more than $200 million in Q4 revenue from its Staking, Earn, and Custody products.

Earlier this year, the crypto exchange reduced its workforce by 20%, following an 18% layoff round in 2022. But analysts at Jefferies said Coinbase remains well-positioned to endure the ongoing crypto winter, citing the company’s “premium brand, position as an onshore/regulated entity, scale, and healthy balance sheet.”

The firm’s CFO Alesia Haas said the crypto market has notably rebounded in the current quarter compared to Q4 2022, saying that Coinbase bagged $120 million in transaction fee revenue in January. Haas said:

“We’re seeing what we’ve seen always in crypto. It’s overall volatility and market conditions that drive trading activity and…these idiosyncratic events have changed that longer-term dynamic that we’ve seen.”

Stronger Crypto Regulation Coming/h2

Last week, the Securities and Exchange Commission (SEC) proposed a rule that would bring radical changes to federal custody regulations. In other words, the proposal aims to expand custody rules to include crypto assets and force companies to secure registration in order to retain those user assets.

“I support this proposal because, in using important authorities Congress granted us after the financial crisis, it would help ensure that advisers don’t inappropriately use, lose, or abuse investors’ assets,” said SEC Chair Gary Gensler.

The move comes as part of the SEC's plans to “expand the scope” to include any user asset under the custody of an investment advisor. If adopted, the rule amendments would mark the most direct effort by the SEC to regulate crypto exchanges, many of which have developed robust institutional custody programs to serve wealthy individuals and investment firms.

The changes also coincide with the SEC’s aggressive efforts to accelerate enforcement attempts. But first and foremost, it represents the latest and possibly the most serious threat to crypto exchange custody programs as other U.S. federal regulators actively advise banks against holding user crypto assets.

While the proposal does not specifically mention crypto companies, the SEC chairman Gary Gensler said in another statement that even though some “crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians.”

The amendments would force institutions that want to custody client assets, particularly crypto, to hold the charters or register as a broker-dealer, futures commission merchant, or qualify as a certain type of trust or foreign financial institution.

The securities regulator said the new rules would not affect the requirements to become a qualified custodian, as there was nothing preventing state-chartered trust firms such as Coinbase or Gemini from serving as licensed custodians.

Among other things, the amended rules would also ask custodians and advisors to have a written agreement, expand the current “surprise examination” requirements, and improve recordkeeping controls. The agency officials said the proposed changes did not determine which crypto assets the SEC considered securities.

Summary/h2

Coinbase shares failed to stage a major rally on Wednesday despite the cryptocurrency exchange reporting better-than-feared numbers for its fourth quarter. The profit beat was largely driven by cost-cutting measures that were announced recently. However, it seems that investors are still cautious about Coinbase given the depressed trading volumes.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance , for weekly analysis of the biggest trends in finance and technology.

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Written By: Shane Neagle