Kudos to Coinbase Global Inc (NASDAQ: COIN), a cryptocurrency exchange listed on Nasdaq, for weathering ongoing regulatory challenges.
This company, under Brian Armstrong’s leadership, has been consistently in the crosshairs of regulatory bodies, attracting significant criticism and opposition.
Just recently, the US Securities and Exchange Commission (SEC) recommended that Coinbase halt trading for all cryptocurrencies excluding bitcoin, a move that could potentially eradicate over 60% of Coinbase’s transaction revenue instantly.
In the preceding month, the SEC confronted Coinbase with a lawsuit accusing them of securities law infringements, claiming that Coinbase has illicitly facilitated the buying and selling of cryptocurrency assets since at least 2019.
To put it bluntly, Coinbase’s business revolves around cryptocurrency, while US regulators seem determined to suppress cryptocurrency operations as much as they can.
Despite these critical threats, Coinbase’s performance isn’t too disappointing, even though this has been at the expense of many employees. Crafty financial reporting has also played its part.
In terms of losses and trading volumes, Coinbase demonstrated improvements during its second-quarter earnings call on Thursday. The group reported positive underlying earnings (EBITDA) for the second quarter consecutively after a string of harsh losses over three quarters.
On the contrary, net profit figures painted a different picture, as Coinbase incurred US$97 million in losses, marking the sixth consecutive quarter of losses.
With Coinbase’s high debt-to-equity ratio nearing 60%, this could pose problems in the forthcoming years when long-term debts are due.
Nevertheless, these losses depict a significant improvement from the billion-dollar-plus losses the group faced around the same time last year, largely due to massive employee cuts.
But there is no way to put a positive spin on Coinbase’s drastically diminishing transaction revenues and volumes.
Despite the rebound in bitcoin and other cryptocurrency prices in 2023, total transaction revenues across consumer and institutional segments in the recent quarter were 10% lower than in the third quarter of 2022, when the crypto market downturn started and prices fell below today’s values.
Furthermore, total transaction revenues in the recent quarter were barely better than those in the fourth quarter of 2022, when the FTX catastrophe led bitcoin prices to a two-year low.
Raw trading volumes depict an even grimmer scenario. At US$92 billion, these are the lowest since late 2020.
Although interest income has helped mitigate some of these losses in the short term, with inflation in developed economies starting to decrease, interest rates are expected to decline in 2024 and 2025. This, however, could be beneficial for cryptocurrency prices.
Earnings from staking, listed as blockchain rewards on Coinbase’s balance sheet, have also helped balance out the loss in transaction revenue. Still, there are concerns about the long-term sustainability of this approach.
Earlier this year, US regulators restricted and banned the staking program of Coinbase’s competitor, Kraken. It’s almost certain that Coinbase’s program is also under scrutiny.
This sums up a dual-threat situation for Coinbase, facing scrutiny from Gary Gensler’s SEC on one side and generally decreasing volumes in the cryptocurrency markets on the other.
Nevertheless, amidst these challenges, Coinbase shares have seen a year-to-date increase of over 170%. An impressive feat for a company that seems to be on the receiving end of regulatory blows.
