February 22, 2023

Editor’s Note: Welcome back to another issue of CoinSnacks. Last week, we finally moved our letter to a new Email Service Provider 😀. That said, if our emails are now landing in your Promotions/Junk tabs, please do us a favor and add (or, drag & drop) CoinSnacks back into your primary “inbox”.

After that, click around, check out the new design, and let us know if you have any feedback or suggestions!

All the best,
CoinSnacks

📌 MUST READS

Coinbase Q4 Earnings: Another Mixed Bag

It’s once again earnings reporting season for Coinbase (COIN).

As we have been doing for years (see Q2 and Q3), let’s go over the good, the bad, and the hopeful for Coinbase’s fourth-quarter earnings report.

The Good
Despite the FTX nuclear disaster in Q4, Coinbase posted net revenue of $605 million, beating the analyst expectation of $588 million and up 5% from Q3’s $590 million.

This positive revenue gain was driven by a boom in subscription revenue from $210.5 million in Q3 to $282.8 million in Q4, a 34% increase. As it was in Q3, Coinbase can thank the Fed for this subscription revenue. That’s because the primary catalyst of Coinbase’s subscription revenue is interest payments on its stack of $2 billion USDC stablecoin. Because the Fed has raised interest rates so dramatically, these interest payments have become extremely lucrative.

Subscription and service revenue has become a key focus for Coinbase, especially as the bear market depresses transaction volume, so it is very encouraging to see a 34% Q/Q increase in revenue.

The Bad
Unfortunately, there was a whole lot of bad in Coinbase’s Q4 earnings.

Consumer transaction revenue was $308.8 million, down 11% from Q3’s $346.1 million and a whopping 85% from Q421’s tally of $2.85 billion.
Institutional transaction revenue came in at $13.4 million, down 32% from Q3’s $19.8 million and 85% from Q4’21’s count of $90.8 million.
The total revenue of $322.1 million is down 12% from Q3’s $365.9 million and 85% from Q4’21’s $2.276 billion.
Trading volume has dropped from $26 billion in Q3 to $20 billion in Q2, a 23% decrease.
The net loss for Q4 was $557 million, and $2.6 billion for the full year.

The Embarrassing
Looking deeper into the financials, there are a few things that are just downright embarrassing at this point for a company that has been around as long as Coinbase.

The company still can’t stabilize revenue. Transaction revenue, or the revenue that Coinbase makes on every trade on the platform, continues to whipsaw back and forth based on the whims of the crypto market. Although that is to be somewhat expected, it makes it very difficult to be an investor in the stock at this point. Coinbase investors are practically token investors nowadays, as the stock price pretty much just correlates with BTC and the rest of the cryptoasset market. The only bright side here is that they no longer have FTX as a competitor who was forcing fee compression.
Stock based compensation is ridiculous. Although revenues in 2022 were down more than 50%, stock based compensation was up more than 50%. This is pure dilution to shareholders and now makes up nearly 70% of total revenue. The worst part is, it doesn’t look like the company has major plans to slow this down.
Headcount remains high. Although Coinbase announced major layoffs over the past few months, their financial statement still shows a YoY increase from 3,730 to 4,510. Now, to be fair, the updated head count might not show up in the statements until Q1 2023.

The Hopeful
2022 was a bad year for Coinbase. But there are signs that better days are ahead.

Its main US competitor, FTX, is in the grave.
Regulation is on the way, and as the preeminent regulatory-compliant exchange, Coinbase is in a strong position to benefit from the increase in institutional trading that regulation would bring.
The company is still flush with cash – $5.49 billion to be exact.
The crypto markets are possibly turning a corner, and Coinbase has benefited, generating $120 million in transaction revenue in January 2023.

Considering the strong position that Coinbase is in regarding runway and regulation, if the markets do flip bullish, Coinbase can easily become profitable once again.

Some Predictions
Like most public companies struggling to keep their shareholders happy, Coinbase will likely look to pivot or double-down in certain areas of its business. Here are some possibilities:

Will acquire a “Digital Identity” company. Brian Armstrong has been hot on this concept for a while, and he mentioned it once again on the earnings call. Digital Identity is the idea of using cryptographic technologies to create “passports” and have the ability to verify identity on the internet. Some potential acquisitions include Unstoppable Domains and Disco, which Coinbase both invested in.
Continued focus on SaaS revenue. As we touched on in the ‘embarrassing’ section above, Coinbase can’t seem to get its arms around stabilized revenue. We would expect the company to continue to focus on recurring SaaS-type revenue through product offerings such as Coinbase One.
Prime Brokerage business offering should increase. With the collapse of Genesis, we would expect Coinbase to pick up a good amount of customers in this business unit in 2023 and beyond.
ETH staking revenue will increase. After the Ethereum merge in late 2022, ETH yield briefly jumped from ~4.5% to 5-7% or more. We would expect to see this added revenue show up in Q1 2023.

Putting it all together, Q4 wasn’t the best showing for the “premier” crypto exchange. The financials weren’t great, the earnings call was boring, and regulation continues to be a major factor.

With that being said, this is the Coinbase team’s 4th crypto cycle. With that experience and $5.5 billion in cash on the balance sheet, we wouldn’t count the company out just yet.

I warned the U.S. Pentagon — now, I’m warning you

The man who stood up at the New York City CFA Society in 2008 and warned about a crash has a new prediction. “The next few months will be a financial disaster,” he now says.

But here’s the thing...

He’s not predicting a stock crash, a dollar crisis, or anything of the kind. Instead, he has a much more peculiar warning for 2023. You might not agree with his analysis. But ignoring him could be your costliest mistake of 2023.

Click here for details

🔍 DEEP DIVES

The NFT Exchange Wars: Blur vs OpenSea

Since the creation of NFTs, there has been one marketplace that has dominated all others: OpenSea.

Valued at more than $13 billion in its last funding round in January 2022, it seemed like the future for NFT exchanges was going to be a competition for second place as first was already decided.

But that dominance now has its first legitimate challenger. With crypto market variabilities combined with a new business model, Opensea has for the first time ever lost its dominance.

The challenger is a new NFT marketplace named Blur, which is now doing more trading volume than OpenSea.

Introducing Blur
A most simple explanation of Blur is that it is an NFT marketplace where people can buy and sell NFTs.

What differentiates Blur from other NFT marketplaces, and specifically its main competitor OpenSea, is:

Zero trading fees. OpenSea, meanwhile, typically has a 2.5% trading fee.
It is an aggregator. Instead of strictly offering NFTs listed on Blur, Blur pulls from OpenSea, LooksRare, and X2Y2 to offer traders the broadest possible range and lowest possible prices.

These improvements and Blur’s (in our opinion) pretty sleek user interface make it a compelling challenger to OpenSea’s throne, but it doesn’t put it over the edge. OpenSea has been too dominant for too long to lose its crown over relatively minor differences.

And Blur knows this. That’s why they’ve declared all-out war.

Shots Fired
Blur has recently fired two significant shots in OpenSea’s direction.

The first was the release and airdrop of its token, BLUR. As it is with all airdrops, people were very excited to claim their free magic internet money, which they did in force. The result was a rush of attention to Blur, which resulted in trading volume that surpassed the currently token-less OpenSea.

The second was its blocklisting announcement that it would enforce any royalty fee requested by NFT creators, so long as they block their JPEGs from being listed on OpenSea. To fully understand why Blur did this, we have to cover the royalty wars:

Royalties are the commission that NFT creators receive each time one of their projects are sold. Historically, NFT marketplaces have always enforced these royalties.
Last fall, Blur said ‘screw that’ and stopped honoring royalties. The hope was that this would make buying NFTs cheaper, incentivizing people to migrate to Blur.
OpenSea suddenly found itself in a tough spot. Dropping royalties would lead to a creator uproar, but not dropping them would hurt their prices compared to Blur.
As a result, OpenSea released a blocklist tool that allowed creators to block their NFTs from being traded on any marketplace that didn’t honor royalties. The collections that used this tool would be granted full control of their royalties on OpenSea.
This obviously hurt Blur, as creators now had an incentive to keep their art off the marketplace.
Blur needed to find a way to attract creators back to its platform. Enter the OpenSea blocklisting announcement.

So, in a mere couple of weeks, OpenSea has seen a competitor capture everybody’s attention with a token airdrop and encourage creators to leave its platform.

A response was desperately needed.

OpenSea’s Response
OpenSea’s response was largely a waving of the white flag.

In the NFT marketplace world, this means that OpenSea now:

Has zero trading fees (for a limited time).
No longer blacklists marketplaces that don’t honor full royalty payments, including Blur, meaning creators no longer have to choose between the platforms to earn their royalties.

The result is that OpenSea now looks… well, a lot like Blur. The only major difference being the actual experience of using the marketplace. Considering that Blur is slicker, faster, and more gas-efficient than OpenSea, this is likely what Blur wanted the whole time.

Final Thoughts
We don’t often cover NFTs on CoinSnacks, and that’s for a reason. It is still so nascent and volatile. Losing money isn’t just possible; it’s likely.

But, for those of you who do deal in JPEGs, the NFT marketplace wars are a positive development. Competition breeds improvement, and that is exactly what’s happening here with Blur pushing OpenSea to evolve.

The result for all NFT connoisseurs is a faster, cheaper, and cleaner trading experience.

The secret to getting an edge in a competitive market

The best investors, entrepreneurs, and programmers wouldn’t be where they were today if they didn’t build a daily learning habit. Sounds simple, but in our hectic world it’s next to impossible. That’s why Brilliant is so amazing.

Brilliant is a tool that makes it easy to master concepts in math, data, and computer science in minutes a day. They have thousands of interactive lessons that get you hands-on with the core ideas behind cutting-edge technology like AI, neural networks, quantum computing, and more.

Even better, Brilliant’s snackable, visual content and gamified learning experience helps you build a daily learning you’ll actually keep. So you’ll continue to hone your problem-solving skills and stay ahead of the pack.

Build powerful skills and sharpen your analytical thinking in minutes—and discover why 10 million+ people are already using Brilliant to get an edge.

Try Brilliant free for 30 days

📝 TWEET OF THE WEEK

Jesse Powell @jespow

I have a theory:
Regulators let the bad guys get big and blow up because it serves their agenda.

1. destroy capital/resources in crypto ecosystem
2. burn people, deter adoption
3. give air cover to attack good actors

The bad guys are actually on-side. Good guys are the enemy. https://t.co/DZI2O8gVyO

CryptoSlate @CryptoSlate

Kraken and Custodia Bank CEOs say regulators ignored their warnings about scams and fraud

@jespow and @CaitlinLong_ said that trying to do the right thing by warning regulators of possible scams blew up in their faces.

via @TheMonsoonChild

https://t.co/MSWSWSFFcG

Feb 19, 2023

7.41K Likes 1.53K Retweets 582 Replies