Can A Diverse Revenue Mix Lift Coinbase?

The Coinbase share price has risen 17.6% in 2024, but has pulled back 26.9% from its 52-week high in March as excitement around spot bitcoin ETFs has dwindled. Diversifying its revenue mix will likely be a key growth driver for COIN stock in the face of regulatory uncertainty.

Coinbase [COIN] is one of the largest crypto exchanges in the world and offers its customers access to a number of cryptocurrency-related products, including Coinbase Wallet and USD Coin (USDC), a stablecoin fully backed by US dollar assets.

This stock spotlight will discuss the macroeconomic factors that are impacting Coinbase’s revenue and trading volume and why diversification will be important for COIN stock’s future growth amid regulatory scrutiny from the Securities and Exchange Commission (SEC).

Coinbase Urges SEC to Rethink DeFi Rule

Last Wednesday, Coinbase’s official X account put out a one-word post: ‘cbBTC’. This denotes Coinbase BTC; a tokenized version of bitcoin that is expected to run on Base, Coinbase’s Ethereum Layer 2 network. The post — to which Coinbase replied ‘Coming soon.’ — has been interpreted as a signal that the company intends to shake up the decentralized finance (DeFi) market.

Though there has been no official announcement, some senior employees have seemingly confirmed the news.

On the DeFi front, Coinbase submitted a letter to the SEC last week urging it to abandon its“arbitrary and irrational” rule change that would pull decentralized exchanges under its jurisdiction. Coinbase Chief Legal Officer Paul Grewal warned that it would be impossible for DeFi projects to exist in the US if the SEC does not rethink the rule.

COIN Stock Pulls Back After Spot Bitcoin ETF Buzz

COIN stock is up 17.6% since the start of 2024 through 19 August and has surged 172% in the past year, a rally fueled by excitement around spot bitcoin ETFs. However, Coinbase’s 19 Augustclose was 26.9% below its 52-week high recorded on 25 March.

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Coinbase Beaten by Robinhood on Q2 Trading Volume

Coinbase’s Q2 revenue came in at $1.4bn, up 105% year-over-year but down 11% compared to the previous quarter. The company attributed this to elevated crypto asset prices, which, like its share price, hit a 52-week high in March, following the launch of spot bitcoin ETFs.
 
Trading volume for the three months to 30 June was down 28% quarter-over-quarter. Again, this was attributed to the launch of bitcoin ETFs and investors shifting their money into these products during March.
 
As for Q3, the company is expecting its subscription and services revenue to be impacted by “modest headwinds”, including the expectation that the US Federal Reserve will cut rates in September, a decline in ether prices and an increase in expenses related to the promotion of USDC.
 
Robinhood’s [HOOD] crypto trading volume for the three months to 30 June jumped 137% year-over-year to $21.5bn, but this was a sharp drop from $36bn in Q1. Block’s [SQ] Cash App was used to sell $2.61bn worth of bitcoin in Q2, down from $2.73bn in Q1.

Source: Yahoo Finance

The decline in Coinbase’s projected revenue growth may seem alarming, but it reflects the volatile nature of the crypto industry. If the crypto bull run were to continue beyond 2024, then COIN stock’s outlook could quite easily be more bullish.

COIN Stock: The Investment Case

The Bull Case for Coinbase  

Diversification will be key to Coinbase sustaining revenue growth. Needham and Company Analyst John Todaro points out in a May note seen by BNN Bloomberg that Coinbase already makes approximately a third of its revenue from sources other than trading fees, including USDC.

Additionally, its Base blockchain, which debuted last year, has the potential to be “a $300m annual revenue opportunity”, according to Todaro.

Analysts at Franklin Templeton Digital Assets believe Base has hit a “home run” thanks to its adoption in meme coins and social finance (SocialFi) applications. SocialFi is where users can monetize online interactions made through social networks built on blockchain technology.

Base currently accounts for approximately 46% of all SocialFi-related transactions, but it is well primed to capture a “material share” of SocialFi activity, according to a research note posted by Franklin Templeton to its X account.

The Bear Case for Coinbase 

Wild swings in net income are not uncommon for crypto exchanges and companies with exposure to bitcoin on their balance sheet. 

Coinbase’s Q2 net income was $36m, down from $1.2bn in Q1. However, Q1’s number includes a one-time $737m gain as a result of the company using a new accounting rule for the first time in the January–March period. This new rule allows firms to report crypto on their balance sheets at the current market value — also known as fair value — whereas they were previously reported at their original cost minus any losses. 

All companies must report their crypto at fair value after 15 December. While the rule will boost the balance sheets of companies that hold crypto, investors need to be wary of the potential volatility that could result from Coinbase relying on these accounting adjustments. 

Conclusion

Like all crypto stocks, the Coinbase share price can be volatile. While near-term revenue growth could slow significantly if the current bull cycle were to end this year, the company is diversifying its revenue mix, which should help it to withstand any price volatility.

Nevertheless, investors should be mindful that the new accounting rule allows Coinbase to benefit from pre-tax crypto asset gains. This is likely to have a significant impact on net income in future earnings. 

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